Talks aimed at reaching agreement with creditors to cut Greece's debt burden broke down in Athens on Friday, increasing the likelihood that heavy losses will be forced down the throats of unwilling investors.
The talks are seeking to slice €100 billion ($126.7 billion) from the Greek government's €350 billion in debt without delivering an ultimatum to private bondholders, who together hold more than €200 billion of bonds. At stake is whether the first debt default by a current member of the European Union will occur through an accord in which most investors go along voluntarily or whether losses will be forced on them.
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The halt in negotiations between the Greek government and investors led by the Institute of International Finance, a Washington-based lobby group, shows how the small economy at the origin of the euro zone's debt crisis retains the capacity to shake confidence in the entire 17-nation currency bloc.
Government officials fear that an enforced default would be seen in financial markets as increasing the likelihood of similar defaults among other weak economies in the euro area.
After two days of talks, the IIF said in a statement that discussions hadn't "produced a constructive, consolidated response" and had "paused for reflection." No dates were fixed for a resumption of the talks.
The IIF agreed in October that it would negotiate a "voluntary" deal on the basis of a 50% cut in the face value of bonds held by the private sector. The main dispute between the two sides on Friday related to the annual interest payments on new bonds that would be exchanged for old.
The IIF is seeking an annual coupon of 4%-5%, arguing that is the absolute lower limit of any deal that could be described as voluntary, according to people with direct knowledge of the talks. Some euro-zone governments, led by Germany and supported by the International Monetary Fund, have been pushing for an interest rate of well below 4%, these people said.
For Germany and the stronger economies providing aid to Greece, the less Greece has to pay out to bondholders, the less money the rescuers will need to shell out.
The negotiations have been tortuous. After first insisting no default by any euro-zone country would be possible, leaders agreed in July to seek a deal to cut about 10% from the face value of Greece's bonds in private hands. By October, Greece's prospects had deteriorated, and euro-zone governments and the IIF agreed to pursue a deal to cut the face value in half. Since October, Greece's economy, which is entering its fifth year of recession, has weakened further, worsening the state of its government finances. That means a bigger gap in Greece's budget that must be filled either by more debt relief or more new lending from official creditors.
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Greek Finance minister Evangelos Venizelos leaves the Greek premier's office Friday after a meeting with the Institute of International Finance.
In an interview Thursday before the talks broke up, IIF Managing Director Charles Dallara expressed frustration about "the lack of a clear process to finalize negotiations."
Negotiators for investors have been frustrated that they have to seal a deal not only with Greece but also with a host of other interested parties including the IMF, European Central Bank and the 16 other members of the euro zone.
The IMF on Friday said it was looking forward to talks resuming but noted it was important the deal ensured the sustainability of Greek debt. European officials say the IMF is skeptical a voluntary accord would reduce Greece's debt enough to avoid another restructuring.
Greek Prime Minister Lucas Papademos on Friday said the country faces acute financial risks until it completes talks on the debt restructuring and a new dose of aid from other euro-zone governments and the IMF.
"We have complete awareness of how crucial the situation is. Only after these issues have successfully closed will we be able to say that the country will step on solid ground," he said.
Frank Vogl, who handles the media affairs for the IIF, said talks could resume next week "but this depends on developments over the next few days."
Meanwhile, the clock is ticking on a voluntary deal. Mr. Dallara on Thursday said only a few days remain to complete negotiations because of the complicated legal and other procedures surrounding a bond exchange. On March 20, a €14.5 billion bond matures that Greece won't be able to cover unless others foot the bill. To have a voluntary agreement in time, European leaders would have to sign off at a European Union summit on Jan. 30. Source