Greek talks go down to the wire

Private bondholders refuse to accept further losses on the face value of their assets.

By InvestSMART · 24 Jan 2012

By InvestSMART ·
24 Jan 2012

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Private bondholders refuse to accept further losses on the face value of their assets.

NEGOTIATIONS over the fate of the Greek economy are going down to the wire after private bondholders refused to accept further losses on the face value of their assets.

Before last night's crucial meeting of European finance ministers, the managing director of the Institute of International Finance, Charles Dallara, said he was hopeful the European Union and International Monetary Fund would avert a Greek default by agreeing to terms for private sector involvement in a debt-swap deal.

The IIF, which represents private holders of Greek debt, had previously agreed to a 50 per cent ''haircut'' on the value of about ?200 billion ($A246 billion) of bond holdings. Mr Dallara said IIF members had made their ''maximum'' offer, without saying what that offer was.

''The elements now are in place for a historical voluntary private sector involvement deal,'' Mr Dallara told Athens-based Antenna TV.

''It is a question now, really, of the broader reaction of the European official sector and, of course, of the IMF to this proposal.''

A Greek debt-swap deal would see private bondholders exchange outstanding bonds for new ones to help reduce the country's borrowings to 120 per cent of gross domestic product by 2020.

But European officials and bondholders have not been able to agree on the interest rates and maturity of the new bonds, which would determine losses for investors.

At issue is the fact that the Greek economy was expected to shrink by about 6 per cent last year, according to the latest IMF estimates, compared with a June forecast of 3.8 per cent.

Because of that, IMF and European Union officials are said to be pushing for bondholders to accept lower interest rates on new bonds.

And an agreement is key to a ?130 billion financing package for Greece, which faces a ?14.5 billion bond payment on March 20.

Investors remained nervous yesterday, with the S&P/ASX 200 Index slipping 14.5 points to 4225.1.

''It has made for a pretty tense Asian trading session,'' said IG Markets market strategist Stan Shamu. ''However, despite some disappointment that no deal has materialised, there has been no real panic selling either.''

Senior National Australia Bank strategist Emma Lawson said currency markets oscillated early in the day, but with financial markets in China, Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Malaysia shut for the Lunar New Year holiday, they remained largely unaffected by the news.

''Currency markets aren't reacting very much,'' Ms Lawson said. ''I think we need to see how hard the IIF are going to dig their heels in. They've told us the next move is down to the IMF, and the IMF says bondholders need to take greater cuts.''

With the World Economic Forum starting in Davos, Switzerland, this week, and with European finance ministers debating a new fiscal compact for Greece, investors will stay tuned to Europe.

The dollar finished the Australian session at $US1.0486 compared with $US1.0409 at the close on Friday.

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Frequently Asked Questions about this Article…

What are the Greek debt talks and why are they going down to the wire?

The Greek debt talks refer to negotiations between the European Union, the International Monetary Fund (IMF) and private bondholders over a debt-swap deal to avoid a Greek default. They’re described as “going down to the wire” because private bondholders have refused further losses on the face value of their bonds, and officials must still agree on terms quickly to secure a crucial financing package and meet imminent payment deadlines.

What is a debt-swap deal and how would private sector involvement work for Greece?

A debt-swap deal would have private bondholders exchange existing Greek bonds for new bonds with different interest rates and maturities. The aim, according to the article, is to reduce Greece’s borrowings to about 120% of GDP by 2020 through voluntary private sector involvement — i.e., bondholders accepting changed terms rather than an outright default.

What position did the Institute of International Finance (IIF) and Charles Dallara take in the negotiations?

The IIF, which represents private holders of Greek debt, previously agreed to a 50% 'haircut' on roughly €200 billion of bond holdings and said members had made their 'maximum' offer. Charles Dallara of the IIF expressed hope that the EU and IMF would accept terms to avert a Greek default, while noting final agreement depends on official-sector reactions.

How much loss have private bondholders already accepted and why are they resisting further cuts?

According to the article, IIF members had earlier agreed to a 50% haircut on about €200 billion of bonds. They are resisting further losses because that would reduce the face value of their assets even more, and negotiations remain unresolved over the interest rates and maturities of replacement bonds — the features that determine investors’ ultimate losses.

How would the interest rate and maturity terms of new bonds affect investor losses?

The article explains that interest rates and maturities of the new bonds are the main determinants of investor losses: lower interest rates and longer maturities reduce the present value of future payments and therefore increase the effective loss for bondholders. IMF and EU officials are pushing for lower interest rates given Greece’s worse-than-expected economic contraction.

What’s at stake financially for Greece and what deadlines should investors watch?

An agreement is key to a €130 billion financing package for Greece. The article highlights an urgent deadline: Greece faces a €14.5 billion bond payment on March 20. Failure to secure a deal before key payments could raise default risk and market volatility.

How did markets react to the Greek negotiations and what did analysts say?

Investors were nervous but not panicking: the S&P/ASX 200 Index slipped 14.5 points to 4225.1, and strategists said the situation made for a tense Asian trading session. Currency markets oscillated early but remained largely unaffected — partly because many Asian markets were closed for the Lunar New Year. Analysts pointed to the need to see how strongly the IIF and the IMF will press their positions.

What should everyday investors monitor while Greek debt talks continue?

Everyday investors should keep an eye on key developments the article highlights: decisions by European finance ministers, the IMF’s reaction to private sector proposals, any agreement on interest rates and maturities for new Greek bonds, and the March 20 bond payment deadline. The article also notes global forums such as the World Economic Forum in Davos as times when policymakers and officials may signal progress or concerns.