Greece Upbeat Ahead Of Debt Inspectors' Return

Published January 16, 2012 2:09PM (EST)

ATHENS, Greece (AP) — Greece is gearing up for another tough week of negotiations on the country's crucial second bailout as it tries to revive talks with private investors and has its economy scrutinized by a team of international debt inspectors.

Government spokesman Pantelis Kapsis said Monday: "This is a critical time for the Greek economy ... the negotiations are very difficult."

"It is understood that there will be renewed pressure (from the debt inspectors) to speed up structural reforms."

The mission heads of inspectors from the so-called "troika" — the International Monetary Fund, European Central Bank and European Commission — are expected to arrive next week. The technical teams, meanwhile, will begin work in Athens Tuesday, the same time Horst Reichenbach, the European Commission's task force chief for Greece, is also due for a four-day visit.

An integral part of the euro130 billion ($166 billion) second bailout is a bond swap deal with private creditors that is crucial to avoid a devastating default. But those talks appeared close to collapse Friday amid disagreements over the interest rates of the new bonds. The negotiations are expected to resume this week, probably Wednesday.

Known as the Private Sector Involvement, or PSI, the talks aim to reduce Greece's debt by euro100 billion ($127.8 billion) by swapping private creditors' bonds with new ones with a 50 percent lower face value. Without it, the country could suffer a catastrophic bankruptcy that would send shock waves through the global economy.

"Despite the difficulties, there is optimism for the outcome" of the second bailout deal, Kapsis said.

Charles Dallara and Jean Lemierre of the Institute of International Finance, a global body representing the private bondholders, met in Athens last week with Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos, but the talks were suspended on Friday, with the IIF saying that despite Greek efforts, there had not been "a constructive consolidated response by all parties."

People familiar with the talks said that while a deal appeared close last Thursday, a problem arose Thursday night over the interest rate the new bonds would have, with the International Monetary Fund and Germany seeking a coupon rate below 3 percent — a very low rate for bonds that are paid off in 20 to 30 years' time.

The people spoke on condition of anonymity to disclose details of the highly sensitive negotiations.

An interest rate that is that low is unlikely to be accepted by the banks and investment funds holding government bonds — a crucial issue as the bond swap must be voluntary if the deal is not to be considered a "credit event" that could trigger the payment credit default swaps — essentially insurance against a default.

Greece is running out of time to clinch a deal, as it faces a massive euro14.5 billion bond redemption on March 20 that it cannot afford to pay.

The second bailout comes on top of a first, euro110 billion rescue package that Greece has been relying on since May 2010, after years of overspending and waste left it facing an untenable public debt.

By Salon Staff

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