By Helia Ebrahimi
9:01PM GMT 14 Jan 2012
Three months of negotiations ground to a halt on Friday night, amid a wave of downgrades by ratings agency Standard & Poor’s aimed at a clutch of European countries, including France.
The unexpected breakdown in talks between Greece and its private-sector creditors has taken the country a step closer to bankruptcy after a failure to sign up lenders to a voluntary and “orderly” 50pc haircut to their holdings.
Greece’s finance minister Evangelos Venizelos said talks would resume on Wednesday to “bridge differences” but insiders remained sceptical that a deal could be stitched at such a late stage.
The clock is ticking for Greece, as a deal must be reached before March 20, when the country is due to receive a further €130bn (£107bn) bail-out tranche from the International Monetary Fund and must make a key €14.5bn bond payment.
The problem centres on the difference between lenders agreeing to a “voluntary” and orderly default – which would mean swapping into bonds with a lower value – and lenders refusing terms, which would cause a default.
This type of “credit event” would trigger billions of insurance claims through credit default swaps (CDS), insurance policies taken out to protect investors in the event of a default.
The problem is that, of the €315bn of Greek debt outstanding, only €7.8bn is covered by Greek CDS. The vast majority of Greek debt is held by European banks, which have little insurance on their exposure. Most Greek CDS are held by hedge fund managers – accused by Germany and France of financially benefiting from sovereign woes. Some claim that hedge fund managers would benefit from a default, with Europe’s banks being the losers.
In October last year, the framework of the Greek creditor deal emerged after a late night finance ministers’ meeting. Greek officials and the nation’s creditors agreed in principle to implement a 50pc cut in the face value of Greek debt, with a goal of reducing Greece’s borrowings to 120pc of GDP by 2020.
On Friday evening, the Washington-based Institute of International Finance (IIF), which represents bondholders, said that talks had not produced a “constructive consolidated response by all parties”. The IIF had aimed to implement a swap into new bonds this month. But the two sides still have to agree on the coupon and maturity of the new bonds to determine losses for investors.
The breakdown in talks has been described as “catastrophic” by insiders, who say the repercussions of a default would be felt not just by Greece but by all of Europe.
The bond-swap deal, which aims to cut Greece’s debt pile by €100bn (£82bn), is part of the condition for freeing up €130bn of further rescue funds for the near-insolvent nation. Greece’s credit rating did not change on Friday in S&P’s review of eurozone countries, as it is already considered to be deep into “junk” status.
Lucas Papademos, the Greek prime minister, said the new aid package and bondholder talks were linked and each needed to succeed for Greece to survive. “Neither deal can stand on its own. One is a condition for the other,” he said in a speech on Friday night.
“We are fully aware of how critical the situation is. Until these negotiations are completed, we face dire economic dangers.”
However, Mr Venizelos last week insisted that the threat of a disorderly default could be averted within weeks and that bond swap negotiations could yet be salvaged.