Greece Closes in on Debt Deal
Business + Economy

Greece Closes in on Debt Deal

Greece and its private bondholders drew closer on Friday to a bond swap deal that would prevent the country from sinking into a chaotic default and ease the euro zone's debilitating debt crisis.

Cash-strapped Greece is fast running out of time as it pushes to wrap up an agreement by Monday paving the way for a fresh injection of aid before 14.5 billion euros ($18.5 billion)of bond repayments fall due in March.

Bankers and government officials close to the talks say an agreement to cut Greece's debt is in sight and that the two sides may be able to present a joint proposal at a meeting of euro zone finance ministers on Monday.

"We are very close to wrapping it up," one source close to the negotiations told Reuters on condition of anonymity.

After a breakdown in talks last week over the coupon, or interest payment, that Greece must offer on its new bonds raised fears of a disastrous bankruptcy, the two sides resumed negotiations on Thursday.

Greek Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the head of the Institute of International Finance (IIF) representing bondholders, started a new meeting on Friday morning.

According to one Greek banker, senior euro zone finance officials have scheduled a conference call for Friday afternoon.

High Stakes

The stakes could not be higher. Greece needs to have a deal in the bag before funds are doled out from a 130 billion euro rescue plan that the country's official lenders, the European Union and the International Monetary Fund, drew up in October.

The paperwork involved alone is expected to take weeks, meaning failure to secure a deal soon could put Athens at risk of a chaotic default in March, which in turn could jolt the financial system and tip the global economy into recession.

A large chunk of the bond swap must be agreed by noon on Friday and formalized before Monday's meeting of euro zone finance ministers, Venizelos has said.

"The deal must be completed. There is no more time left," said a Greek government official who requested anonymity.

Adding to the pressure, officials from the "troika" of foreign lenders have begun meetings with the Greek government on Friday to discuss reforms and plans to finalize that bailout package.

Progress has been hard to come by in the latest round of negotiations, with bankers worried about suffering losses far higher than the 50 percent writedown they were expected to take on the nominal value of their bonds.

Actual losses for investors are expected to be much higher depending on the terms, such as the coupon, being negotiated.

A source close to the talks earlier said Athens and its foreign lenders had initially offered a coupon of just over 3.5 percent, but bondholders rejected that as too low. They were seeking a coupon of at least 4 percent, the source said.

Variable Coupon

One of the options being considered is a coupon that rises after staying stable for the first 10 years, another source close to the talks has said.

According to Greek press reports not identifying their sources, the two sides may agree a coupon ranging between 3 and 5 percent, depending on the new bonds' maturities, resulting in a loss for investors of between 65 and 70 percent in terms of net present value.

Investors have also bridled at Greece's threat to enforce losses if not enough bondholders sign up to the deal.

The swap is aimed at cutting 100 billion euros off Greece's over 350 billion euro debt load. The second bailout - drawn up on condition Greece pushes through painful cuts and structural reforms - is expected to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.

Greece is stumbling through its worst economic crisis since World War Two, with unemployment at record highs and near-daily protests and strikes against austerity measures that have deepened an already brutal recession.

Nearly one out of two youths is unemployed and anger against waves of tax hikes and pay cuts is running high.

(Additional reporting by the Athens bureau and Stephen Brown)