This Is Not Good: Greek Creditors End Talks On Debt Swap

Bank Of Greece Protest Riot Shield

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Greek debt restructuring talks have fallen apart, after the government and banks failed to reach an agreement about how much of a haircut investors would take on their holdings.Talks are however set to resume on January 18.

In October, Greek creditors and officials had agreed to a voluntary 50% hair cut on Greek debt. But the government had recently been pushing for interest payments that would make new bonds worth less than the 50% haircut in bonds’ face value. From the IIF release:

“Despite the efforts of Greece’s leadership, the proposal put forward by the Steering Committee of the [Private Creditor-Investor Committee] PCIC—which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness— has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt and the October 26/27 Agreement.

Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach. We very much hope, however, that Greece, with the support of the Euro Area, will be in a position to re-engage constructively with the private sector with a view to finalising a mutually acceptable agreement on a voluntary debt exchange consistent with the October 26/27 Agreement, in the best interest of both Greece and the Euro Area.”

Why this matters?

The debt restructuring could reduce Greece’s massive €360 billion public debt burden, by nearly €100 billion. But, a breakdown in talks increases the likelihood that Greece will default on its debt by failing to meet conditions for a second bailout.

Greece is looking at a €14.5 billion bond redemption in March, and officials had hoped that all debt restructuring talks would have been settled well before the deadline, to avoid paying the full amount. If these talks aren’t finalised in the coming days, international lenders would have come to Greece’s rescue  to help it avoid default. And it’s unclear if Greece will get this avalanche of money.

While German Chancellor Angela Merkel and French president Nicolas Sarkozy said just last week that they would do whatever it takes to make sure that no country leaves the euro, German lawmakers yesterday upped the pressure on Greece.

Officials from Merkel’s CDU party said yesterday, that a Greek exit from the Euro could be manageable, now that the threat from the country has lessened. Michael Fuchs, the Christian Democratic Union’s parliamentary economy spokesman told Bloomberg that Greece would have no choice but to exit the euro as its struggles with its debt burden and fails to regain its competitiveness. From Bloomberg:

“For Greece, “the problem is not whether they are capable of paying their loans — they will not, not at all, never,” Fuchs said by phone from his Berlin office on Jan. 11. Greece is still a “special case” and the other 16 euro members will resolve their debt problems and retain the currency, he said.

Fuchs dismissed the prospect that letting Greece go would trigger speculative attacks against indebted countries such as Spain or Italy. Italy is a “rich” country and banks would be able to withstand any contagion effect, said Fuchs. Talk of contagion from Greece would be “right if we’re talking about two years ago.”

The IMF has since released a statement saying, “We look forward to the resumption of talks between Greece and its creditors. It is important that this lead to a PSI agreement that, together with the efforts of the official sector, ensures debt sustainability.”