Europe Economy

Greek Bond Swap Talks Enter Crucial Phase


The Greek government held crucial talks with representatives of private bondholders on Thursday to hammer out a deal on a bond swap that would reduce the country's debt load and secure an integral part of its second bailout package.

The Parthenon in Greece
Scott E. Barbour | Getty Images

The meeting between Charles Dallara and Jean Lemierre of the Institute of International Finance, which represents Greece's private bondholders, and Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos was to resume Friday.

"A range of issues were discussed and some key areas remain unresolved. Discussions will continue in Athens tomorrow, but time for reaching an agreement is running short," a statement from the IIF said. "It is essential in order to finalize the voluntary (bond swap) agreement that support be given by all official parties in the days ahead."

A senior Greek government official said Thursday's talks were "positive" and "constructive." He asked not to be named due to the sensitivity of the talks.

Senior eurozone finance officials were also meeting Thursday in Brussels to discuss the deal. Athens wa s expecting progress from those talks, too, the official said.

On Wednesday, Venizelos had said the negotiations "have advanced and are now at a very good point."

Greece hopes to finalize the deal soon for the private creditors to take a voluntary 50 percent reduction in the value of their Greek bond holdings. It needs to clinch the deal before it can access any more rescue loans, which are essential to prevent it from defaulting on its debts when it is faced with the repayment of 14.5 billion euros in bonds on March 20.

Government spokesman Pantelis Kapsis said that "we estimate that we can complete this process relatively soon." Speaking on Real FM radio Thursday, Kapsis said that while he could not predict when the debt swap would be finalized, it was "an issue of the next few weeks."

The bond swap, known as the Private Sector Involvement, is a critical part of Greece's 130 billion euros ($165 billion) international rescue which was agreed in October but whose details remain to be worked out.

The deal is essential to containing the country's massive national debt, with the aim of reducing it from more than 160 percent of gross domestic product to 120 percent by 2020.

However, there are also investors with an interest in reducing the chances of a deal. Some hedge funds , for instance, decide to buy up bonds at cheap prices in a bet that they can turn a high profit if they get repaid in full. They may therefore work toward blocking or delaying any agreement on restructuring Greece's debt.

Jon Henes, a partner at New York law firm Kirkland & Ellis who advises hedge funds on distressed investments in Europe and the U.S., said he didn't believe there was a "high likelihood" of Greece and the IIF reaching a deal that would solve Greece's debt problems.

The IIF represents mostly banks and insurance firms . Such traditional investors are more likely to agree to a voluntary haircut that protects them from the much steeper losses they would face in a hard default.

Henes said there was an increasing number of hedge funds seeking to buy up Greek bonds. This, he said, was the main reason behind increasing talk of the possibility of Greece inserting so-called collective action clauses into old Greek bond contracts. That would allow Greece to force a restructuring on holdouts if a majority of bondholders agree to it.

Near-bankrupt Greece has been surviving since May 2010 on rescue loans from other eurozone countries and the IMF . In return for the initial 110 billion euro bailout, the Socialist government at the time imposed a series of deep austerity measures, including salary and pension cuts and repeated rounds of tax hikes.

The austerity has taken a heavy toll on the economy, leaving it facing a fourth year of recession and sending unemployment spiraling. The jobless rate in October shot up to 18.2 percent, compared with 13.5 percent for the same month in 2010, the statistics agency said Thursday.

The budget deficit is expected to hit 9.6 percent of economic output in 2011, about half a percentage point above target, the government has estimated.

Figures released Thursday showed that in absolute terms the 2011 deficit was 21.64 billion euros  ($27.52 billion), just within the target of 21.7 billion euros ($27.6 billion). In 2010, it was 21.46 billion euros ($27.29 billion).

These figures are distinct from the general government deficit, on which Greece's progress in implementing its austerity program is measured.

A ministry statement said state revenues continued to undershoot targets in 2011, which it attributed to a two-day tax collectors' strike last month and a three-week extension for the settlement of tax obligations.

But that was offset by higher-than-anticipated spending cuts.

Even then, state expenditure was 1.89 billion euros ($2.4 billion) higher than in 2010, which the ministry attributed to a spike in the cost of servicing the country's suffocating debt load.