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Greece Inches Toward Deal in Talks With Its Creditors

LONDON — Greece once again appears on the verge of reaching a deal with its private-sector creditors on how much of a loss they would be willing to accept on their bond holdings.

The latest progress comes in the wake of two days of talks in Athens between Charles Dallara of the Institute of International Finance, the bankers lobby representing most investors and Greece’s political leadership.

Image Source | Getty Images

The discussions are expected to continue through the weekend, and officials said some type of announcement on new details could come Saturday or Sunday.

Talks have broken down twice before, largely because the International Monetary Fund and European leaders have pushed for a larger debt reduction in light of Greece’s worsening economic outlook, so there is the possibility that these negotiations will founder, too.

Bankers and officials involved in the discussions say that bondholders have made significant concessions with regard to the interest rate, or coupon, that the new Greek bonds would carry. Having insisted previously on an average rate above 4 percent, creditors now seem willing to accept a rate below 4 percent for the 30-year bonds — perhaps as low as 3.6 percent.

Technical talks are continuing with regard to a bonus payment of sorts that might be included that would pay off in later years in line with improvements in the Greek economy.

On top of the 50 percent nominal loss, or haircut, already agreed, the lower coupon would produce a total loss for bondholders of more than 70 percent.

The latest progress comes at a tense time for Greece. Officials from the three institutions that are keeping the near-bankrupt nation financially afloat — the European Commission, the monetary fund and the European Central Bank — are demanding another round of spending cuts and reforms to justify a release of as much as 30 billion euros ($39 billion) in the months ahead.

A private-sector debt deal is seen as a strict condition to Greece’s securing its next bailout installment.

Officials expect that the deeper bond loss will allow Greece to meet its goal of having a debt-to-gross-domestic-product ratio of 120 percent by 2020.

The recent collapse of the economy has made it all the more difficult for Greece to hit this number.

While a debt agreement may well spur Greece’s next bailout installment, the deeper loss being inflicted on bondholders carries the risk that many investors, in particular hedge funds that in recent months have loaded up on cheap Greek bonds in hopes of a payday this March, will refuse to participate in the deal.

Greece will try to impose the onerous terms on all investors by writing collective-action clauses into the contracts of its old bonds. By doing this, the hope is that the holdouts, estimated to sit on 10 percent to 15 percent of the 206 billion euros ($272 billion) in outstanding securities, will exchange their old bonds for new bonds — preferring the new discounted bonds to their old ones, which may become worthless.

Some hedge funds that have bought at rock-bottom prices may decide to pursue legal action, although such a process could take years with small certainty of success.

Also undecided is what the European Central Bank, which owns 55 billion euros of Greek bonds will do. Despite growing public pressure that it, along with investors, accept a loss on its bonds, the bank has refused to budge.

Talks are continuing between Greece and European officials on a scheme that would allow the bank to swap its Greek bonds for a different form of Greek debt that, unlike the bonds it currently holds, would not be eligible for a haircut.

If such a swap were to occur, the central bank would not be affected if Greece were to invoke the collective-action clauses and force a loss on all bond holders.

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