To avoid a default in the heart of the developed world — a potentially messy and destabilizing event for world markets that could trigger Greece’s exit from the euro zone — the country is banking on a new, three-year, $160 billion bailout program agreed to in principle at a European summit in October. But that new program is premised on savings from the private debt restructuring. Any shortfall on that front would throw financing for the broader program into jeopardy, forcing European nations to increase their contributions to Greece and probably raising doubts at the IMF about whether the fund should continue its involvement.
“Time for reaching an agreement is running short,” Charles Dallara, managing director of the Institute of International Finance (IIF), said in an e-mailed statement Thursday after talks with Greek officials. Despite several rounds of discussions, “key areas remain unresolved,” Dallara said in the statement, issued jointly with Jean Lemierre, an executive with French banking giant BNP Paribas who is co-chairing the committee of private creditors.
Greek officials said they were “very confident” the talks would ultimately prove successful.
But time and market dynamics may disappoint.
A major bond payment is due in March, and each passing week gives investors more reason to hold out in hopes of full repayment. For 18 months now, as part of an international rescue of Greece, bondholders have been repaid in full with the proceeds of international loans — and the mid-course demand for investor losses of 50 percent or more is proving difficult to arrange.
Hedge funds’ impact
In addition, an unknown amount of Greece’s outstanding debt has been purchased by hedge funds at discounts as steep as 70 percent. Those investors often purchase a form of insurance known as a credit default swap, which gives them another incentive to resist the debt restructuring. Even if Greece did not repay them and defaults on their bonds, the investors would collect the full amount of the bond from the third party that sold the insurance.
Those issues and others have complicated the debt restructuring effort, which has stretched over nearly six months since an initial Greek debt write-down was offered in July by the IIF. The IIF’s original deal was ultimately deemed inadequate, and European officials in October demanded that the group try to negotiate a cut of 50 percent in the face value of the roughly $300 billion of Greek bonds held by private investors.
The general outline of the deal is for investors to trade in existing bonds for new ones worth half as much — decreasing Greece’s debt load outright and saving the country billions of dollars annually in interest payments. Large institutional investors such as banks and pension funds, represented by the IIF, agreed to the deal in principle to avoid the steeper losses and potential economic turmoil likely to follow if Greece simply stopped making its bond payments in a general default.
But the exact details of the deal are still under discussion, including the interest rate and duration of the new bonds, and fine points such as whether other “credit enhancements” might be offered to soften the impact of the write-down on the value of the investments.
IMF officials are due in Athens next week to continue discussions about a rescue program that has steadily slipped behind since it was put in place in May 2010. In a review of Greece’s status released in December, the IMF said it was becoming more and more questionable whether the private-sector talks could achieve the twin aims of producing some $150 billion in savings for the country and keeping the deal “voluntary” for bondholders — important to avoiding the stigma and fallout of a general default.
Any private-sector deal would require “near universal participation” from investors to produce the needed savings, the IMF wrote in December, citing the “real risk” that a voluntary deal would fall short of the needed savings and leave Greece’s debt at unsustainable levels.