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.
Frequently Asked Questions about this Article…
What are the Greek debt talks about and why are they going down to the wire?
The talks are negotiations between private bondholders, the European Union and the IMF to arrange a debt-swap deal that would reduce Greece’s borrowing. They’re tense because bondholders have rejected further cuts to the face value of their holdings and officials haven’t agreed on the interest rates and maturities of replacement bonds — issues that determine investor losses.
Who is the IIF and what does the reported 50% 'haircut' mean for bondholders?
The Institute of International Finance (IIF) represents private holders of Greek debt. The IIF had previously agreed to a roughly 50% 'haircut', meaning private bondholders accepted about half the face value of their holdings would be written down as part of a restructuring of around €200 billion (A$246 billion) of bonds.
What is a debt-swap deal and how would it help Greece’s debt situation?
A debt-swap would let private bondholders exchange existing Greek bonds for new ones 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, easing the country’s long-term debt burden if terms are agreed.
Why haven’t bondholders and officials been able to agree on a deal?
The sticking points are the interest rates and maturities of the new bonds. Those features determine the size of losses for investors, and bondholders (via the IIF) and European/IMF officials disagree on how deep those losses should be given Greece’s worsening economic outlook.
How could a failure to reach a Greek debt deal affect everyday investors and markets?
Uncertainty has already made investors nervous: the S&P/ASX 200 slipped 14.5 points to 4,225.1 amid the talks. Market strategists described trading as tense but not panicked. A failure to reach an agreement could increase volatility in equity and bond markets, so investors should watch developments closely.
What role do the IMF and European officials play in the negotiations?
The IMF and European officials are key decision-makers: their response to any private sector proposal is crucial. The IMF has been urging bondholders to accept deeper cuts given Greece’s larger-than-expected economic contraction, and European officials are negotiating the official-sector response and support package.
Are there any urgent deadlines in the Greek financing timetable investors should watch?
Yes. Agreement on private sector involvement is central to unlocking a €130 billion financing package for Greece. Greece also faces a €14.5 billion bond payment on March 20, so near-term progress in talks is important to avoid rollover or default risk.
How have currency markets reacted to the Greek talks and what happened to the Australian dollar?
Currency markets oscillated but were largely muted because many Asian markets (China, Hong Kong, Singapore, South Korea, Taiwan, Indonesia and Malaysia) were closed for the Lunar New Year. The US dollar finished the Australian session at US$1.0486 compared with US$1.0409 at the close on Friday.
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