By Kerin Hope in Athens, Peter Spiegel in Brussels, and James Wilson in Frankfurt, Financial Times
Greece’s international creditors are considering an appeal to the French and German leaders to break a deadlock in negotiations over the size of the losses to be taken by banks and other bondholders as part of a €100bn deal seen as crucial to bringing the country’s debt under control.
The move to involve German chancellor Angela Merkel and French president Nicolas Sarkozy comes after restructuring talks with official investors broke down on Friday raising concerns that Greece was moving closer to becoming the first developed country in nearly 60 years to default on its debt.
In a sign of urgency, Guido Westerwelle, German foreign minister, flew to Athens on Sunday for talks about the so-called private sector involvement (PSI) negotiations with Greek premier Lucas Papademos.
Charles Dallara, the IIF’s managing director, told the Financial Times on Sunday that he believed an agreement in principle needed to be completed by the end of this week if the restructuring deal was to be finalised in time for a €14.4bn Greek bond redemption due on March 20.
Though he said Greek officials were negotiating in good faith, he was critical of other eurozone negotiators, saying they were not living up to the outlines of the haircut deal reached at a tense October EU summit. “[Ms Merkel and Mr Sarkozy] and all the European heads of state said they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,” Mr Dallara said. “Some of their own collaborators are not following that decision.”
“Those who would expect private investors to take unreasonable losses on the coupon don’t understand the nature of a voluntary deal.”
In a radio interview broadcast on Sunday, Ms Merkel said she was monitoring the talks closely and called on the IIF to abide by the terms of the deal agreed in October. “The Greek problem is not yet definitively solved,” she said.
People close to the negotiations said much of the agreement had been in place for several weeks, but that a final deal had stalled over the coupon payment for new 30-year bonds to be issued by the Greek state.
Greek debt managers had agreed with bondholders on a coupon just below 5 per cent but some governments last week proposed a much lower interest rate.
Germany has proposed a 2-3 per cent coupon that would increase bondholders’ losses from 60 per cent to more than 80 per cent in net present value terms.
The interest rate and other terms “must be attractive enough to ensure voluntary participation and the maximum number of interested parties”, said one person close to French bondholders.
“That would amount to wiping out Greek lenders,” said one Athens banker. Greek banks, with total bondholdings of about €40bn, are among the biggest investors in Greece’s debt.
On top of the bond dispute, Greece faces further tense discussions this week on its new €130bn bail-out package.
Officials from the European Commission, the International Monetary Fund and the European Central Bank are due to begin discussions on Tuesday on a new four-year programme of fiscal and structural reforms, that must be approved before the PSI deal can go through.
Meanwhile, the euro hit an 11-year low against the yen of Y97.17 when Asian markets opened on Monday after the credit ratings of nine eurozone economies were downgraded on Friday.