Key Greek Bondholders Meet To Discuss Debt Deal

Published January 25, 2012 9:54AM (EST)

BRUSSELS (AP) — Representatives of Greece's private sector bondholders will meet on Wednesday to discuss how and whether to continue talks on a bond swap after the EU toughened its demands, a person close to the investors said.

The so-called steering committee of the Institute of International Finance will gather in Paris for an "important meeting ... to really take stock" of the talks, the person said on condition of anonymity because of the sensitivity of the issue.

The committee represents banks and other investment funds that hold a large part of Greece's debt.

On Monday, eurozone finance ministers decided to cap the average interest rate Greece can pay to investors taking part in a debt swap designed to cut Greece's debt by euro100 billion ($130 billion) at well below 4 percent.

In their offer last week, the bondholders said the average interest rate should be above 4 percent.

The finance ministers also made clear that they would not increase the amount of rescue loans for Greece above the euro130 billion ($169 billion) tentatively agreed in October.

The interest rate is one of the most important variables in the bond swap that investors as well as the eurozone and the International Monetary Fund hope will bring Greece's debt back to a sustainable level. The plan is to have private investors exchange their old Greek bonds for ones with half the face value and to push repayments 20 to 30 years into the future.

A higher interest rate could help buffer losses for investors, but the eurozone and the IMF say it will prevent Greece's debt from falling to 120 percent of gross domestic product by 2020 — the maximum level they see as sustainable. Without the debt swap, Greece's debt would approach 200 percent of GDP by the end of this year.

If the investors decide against moving ahead with talks for a voluntary deal, the eurozone would face a stark choice between a forced default or new, bigger aid payments to Greece.

In a forced default, bondholders would likely stand to lose an even bigger part of their investments issued and traded by banks and other investors.

The eurozone has so far worked hard to prevent a payout of CDS, since the CDS market is obscure — without a clear picture of who owes what to whom — and they worry that it could create uncertainty and panic on financial markets. The private investors also argue that a forced default would make investors reluctant to lend to Greece and other vulnerable euro countries.

The person close to the private bondholders said the meeting was called for Wednesday because some eurozone officials wanted the deal to be ready for a summit of EU leaders on Monday.

By Salon Staff

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