Crucial talks over a Greek debt write-down failed to reach a solution over the weekend.
CRUCIAL talks over a Greek debt write-down failed to reach a solution over the weekend, leaving the sharemarket to open under a cloud of uncertainty today.
Talks between European officials and private creditors stalled after Greece's private creditors were asked to take a larger-than-expected ''haircut'' on the value of their bond holdings to offset a deeper than forecast recession in Greece last year.
The creditors, represented by the Institute of International Finance, had agreed in October to take a 50 per cent loss on the value of their holdings by ''restructuring'' ?260 billion worth of debt via an exchange of old bonds for new bonds with lower rates of interest.
The agreement would have wiped ?100 billion worth of debt from Greece's massive ?360 billion debt pile.
It would also have saved Greece ?4 billion a year in interest payments, essential if the country's borrowings are to fall to 120 per cent by 2020.
Dr Shane Oliver, the chief economist at AMP Capital, said the local sharemarket would probably open flat today.
''European markets were flat-to-down-slightly last week, and the US share market was flat too, given the uncertainty around how these talks would go,'' he said.
''Monday will be flat-to-down-slightly and then we'll start to take our lead from the European finance ministers' meeting.''
The Australian futures market is pointing to a 10 point fall at the opening of trade today while investors weigh up the prospect of more profit warnings ahead of company reporting season next week.
Greek Finance Minister Evangelos Venizelos wanted the deal finalised before euro zone finance ministers met in Brussels today, where they planned to discuss the aid package.
A deal on the write-down must be struck before Athens can get access to a ?130 billion aid package from the International Monetary Fund. The IMF loan is desperately needed to stop Greece from defaulting when
?14.5 billion worth of Greek bonds mature in March.
A spokesman for the Institute of International Finance said the talks had made ''substantial'' progress.
The parties were nearing an agreement under which old bonds would be swapped for new securities with coupons averaging between 4 per cent and 4.5 per cent.
But the talks stalled when European officials and Greece's private creditors failed to agree on the ''term to maturity of the new replacement bonds'', ''and the rate of interest they will pay''.
Meanwhile, a draft law published by the European Union says banks may be allowed to include asset-backed securities in the liquid assets that regulators demand lenders hold in the event of a credit squeeze.
The securities are currently excluded as liquid assets in rules known as Basel III, making the debt less attractive to banks.
''It's very good news, very good news for European asset-backed securities where demand has been dominated by a few clients, mostly in the US, a senior portfolio manager at Cairn Capital, Stefano Loreti, said.
''This development could help bring back European banks to the investor base.''
With TELEGRAPH and AGENCIES
Frequently Asked Questions about this Article…
What went wrong in the recent Greek debt talks and why did negotiations stall?
Crucial talks over a Greek debt write-down failed to reach a solution because European officials and Greece’s private creditors couldn’t agree on key terms — specifically the term to maturity of replacement bonds and the interest rate they would pay. Creditors had been asked to accept a larger-than-expected “haircut” on their holdings, which stalled progress.
What was the proposed 50% ‘haircut’ and how would a bond swap have affected Greece’s debt?
Private creditors, represented by the Institute of International Finance, had previously agreed to take a roughly 50% loss on the value of their holdings through a swap of old bonds for new ones covering about €260 billion of debt. That deal would have wiped about €100 billion off Greece’s €360 billion debt pile and cut interest costs by around €4 billion a year, helping Greece aim to reduce borrowings toward 120% of GDP by 2020.
How did the stalled talks affect sharemarkets and investor sentiment?
The failure to finalise the write-down left markets under a cloud of uncertainty: European and US markets were flat-to-slightly down and local markets were expected to open flat or a touch lower. Australian futures were pointing to a small opening fall while investors also weighed the risk of more profit warnings ahead of reporting season.
Why is reaching a deal important for Greece’s access to IMF aid?
A deal on the debt write-down needed to be struck before Athens could access a roughly €130 billion aid package from the International Monetary Fund. That IMF loan was described as crucial to prevent default, especially with about €14.5 billion of Greek bonds maturing in March.
Who spoke for the private creditors and what progress did they report?
The Institute of International Finance represented the private creditors. A spokesman for the IIF said the talks had made “substantial” progress and parties were reportedly close to agreeing on replacement bonds with coupons averaging between about 4% and 4.5% before talks stalled on maturity and rate details.
What were the exact sticking points that stopped negotiators from finalising the deal?
The negotiations bogged down over two main issues: the term to maturity of the new replacement bonds and the rate of interest (the coupon) those bonds would pay. Those details determine the real value of any haircut to creditors and Greece’s future debt servicing burden.
How could a change in EU rules on asset-backed securities affect banks and investors?
A draft EU law suggested banks might be allowed to count asset-backed securities (ABS) as part of the liquid assets regulators require under rules like Basel III. Because ABS are currently excluded, allowing them could make that debt more attractive to banks and potentially bring more European banks back into the investor base, according to a senior portfolio manager at Cairn Capital quoted in the article.
As an everyday investor, should I expect more volatility or profit warnings because of these Greek debt developments?
The article notes that uncertainty around the Greek talks was already contributing to flat-to-slightly-down markets and that investors were bracing for the possibility of more profit warnings ahead of reporting season. While it doesn’t give investment advice, it does suggest the immediate impact is heightened short-term uncertainty and potential for modest market moves until the finance ministers’ meeting and any deal outcome.
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