Greece holds new talks on bond swap

By NICHOLAS PAPHITIS | January 13, 2012 | 7:26 AM EST

Greek Finance Minister Evangelos Venizelos, answers question from journalists after the end of his meeting with Prime Minister Lucas Papademos and Charles Dallara, the head of the Institute of International Finance, which represents Greece's private bondholders, in Athens, on Thursday, Jan. 12, 2012. The Greek government was holding crucial talks with its private investors on Thursday to finally reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package. (AP Photo/Petros Giannakouris)

ATHENS, Greece (AP) — The Greek government held a second day of talks Friday with private bondholders on a crucial debt relief deal, with global banking representatives warning that time for reaching an agreement is running out.

The private debt deal is a key part of Greece's second international bailout, worth a total euro130 billion ($166 billion), without which the country could suffer a catastrophic bankruptcy that would send shockwaves through the global economy. The bailout tops a euro110 billion program agreed in May 2010 to keep the country solvent after its borrowing costs soared to unreachable heights.

Greece is rushing to reach a deal on a bond swap that would reduce its debt by euro100 billion ($127 billion) — roughly half its privately held debt burden — ahead of a visit Tuesday by international inspectors monitoring its austerity program.

Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos met Charles Dallara and Jean Lemierre of global banking body the Institute of International Finance early Friday afternoon. After a first round of talks Thursday, a senior Greek finance ministry official said a deal could be struck by the end of next week, with a formal public offer coming at the beginning of February. The official spoke on condition of anonymity because of the sensitivity of the talks.

However, a statement from the IIF warned that "some key areas remain unresolved," and stressed that "time for reaching an agreement is running short."

Frederic Oudea, chief executive of French bank Societe Generale, which holds a substantial amount of Greek debt, said negotiations could finish in the next few days and private creditors might end up accepting losses even larger than the target of 50 percent.

"But we have to be careful to maintain a balance because even if governments are saying that Greece will be a unique case, it will be instructive to investors," Oudea said in an interview with Les Echos newspaper. "It could become a 'cautionary tale' that could weigh on other countries."

The talks are being complicated by the large number of actors involved in the broader bailout deal. Not only the Greeks and the IIF, but the 17 countries that use the euro and the International Monetary Fund who will have to fund the payments to the private creditors also have to sign off.

That is complicating reaching an agreement on contentious issues, such as what interest Greece will have to pay on the new, lower-value bonds, according to people familiar with the talks.

The interest rate is key to determining the cost of the second bailout for Greece's official creditors — the eurozone and the IMF. In contrast to the face value of the bonds, which may not have to be repaid for many years if the restructuring works, the interest has to be paid from the very start.

One person briefed on the talks said there is disagreement among eurozone governments on how much interest Greece should pay — with some pushing for an interest rate as low as 3 percent. That would be very little for bonds that are paid off in 20 to 30 years' time.

The two-year-old Greek debt crisis, which followed revelations that Athens had been underreporting key data on its bloated budget deficit and public debt, has shaken the eurozone and roiled financial markets.

On Friday Greece's foreign ministry said German Foreign Minister Guido Westerwelle will visit Athens Sunday for talks with Foreign Minister Stavros Dimas. Westerwelle is also expected to meet with Papademos.

In Germany, Europe's biggest economy and the sometimes reluctant leader of its rescue efforts, a poll published Friday found that 41 percent of respondents believe other eurozone countries should allow a Greek bankruptcy and 50 percent say they shouldn't.

Only 15 percent think a Greek bankruptcy would be economically good for Germany, while 69 percent believe it would be detrimental, the survey found.

The poll of 1,359 people was conducted for ZDF television between Tuesday and Thursday. It gave a margin of error of plus or minus 3 points.

Athens will only continue to receive the rescue loans if it satisfies inspectors from the European Union, the European Central Bank and the IMF that its austerity program is working. But the 2011 budget deficit is expected to overshoot targets, while the pace of promised reforms remains sluggish. The inspectors, collectively known as the troika, are due in Athens on Tuesday.

Over the past two years, Greece has slashed pensions and salaries while repeatedly hiking taxes, in a deeply unpopular program that has sparked a string of general strikes and often violent protests.

Papademos has urged unions to accept further income losses to boost lagging competitiveness, warning that bankruptcy and an ignominious exit from the euro could otherwise follow.

"If the country does not manage to confront its debt crisis and the economy's structural weaknesses, the consequences for standard of living of workers and pensioners will be dramatic," Papademos told Parliament Friday. "It is preferable to have open businesses with slightly lower wages ... than closed businesses."

He said some 38,000 businesses have closed since 2009. Unemployment hit 18.2 percent in October, while the economy is heading for a fourth year of recession.

Papademos said, however, that it would be hard to further cut the lower end of salaries and pensions, and promised "tough negotiations" with debt inspectors on labor reforms.

"But our ability to negotiate is linked with ... our own ability to address the sources of our problems," he added.


Gabriele Steinhauser in Brussels, Geir Moulson in Berlin and Sarah DiLorenzo in Paris contributed to this report.