Countdown for Greek debt swap

GERMAN Chancellor Angela Merkel and the International Monetary Fund’s managing director, Christine Lagarde, will meet in Berlin tonight as pressure grows to complete the Greek debt swap needed to put a rescue plan in place.

The deal, hammered out by EU leaders, Greek officials and the nation’s creditors in October, called for bondholders to accept a 50% cut in the face value of their Greek debt, with a goal of reducing Greece’s borrowings to 120% of GDP by 2020.

More than two months after the accord was announced, creditors and authorities still need to agree on the coupon and maturity of the new bonds to determine the losses investors would suffer.

The IMF has sought a lower coupon than the range offered by investors to ensure Greece meets the deficit targets amid a worsening economic outlook.

Failure to complete the voluntary swap threatens to further undermine confidence in the EU’s crisis leadership and deter investors from Asia and the US from buying Europe’s debt.

“All non-European investors, except a few bargain hunters, will keep clear of investing in the euro area,” said Espen Furnes, a fund manager at Storebrand Asset Management in Oslo, which oversees $72 billion.

Lagarde will then travel to Paris to meet with President Nicolas Sarkozy.

“The voluntary restructuring of Greece’s debt must be moved forward,” Merkel told reporters in Berlin yesterday after talks with Sarkozy. “In our view, the second Greek program, including the debt restructuring, has to be carried out quickly now because otherwise it won’t be possible to pay out the next tranche for Greece.”

The meetings reflect stepped up activity to resolve the matter. Charles Dallara, Institute of International Finance managing director and co-chairman of the creditors’ steering committee taking part in discussions on Greek debt swap, will be in Athens later this week to continue talks on a plan.

“It is important to build on the progress so far to move the negotiations for a voluntary agreement forward as rapidly as possible,” the Washington-based IIF said.

Investors should brace for the prospect that bondholder losses could spread to other rescued nations, Citigroup Inc Chief Economist Willem Buiter said yesterday.

In Ireland, “there clearly will be a need for either some form of official concessions on the terms and conditions of its financing” or other private-sector involvement in a debt restructuring, Buiter told reporters in Dublin yesterday. Portugal may also have to engage in a restructuring of its sovereign debt, he said.

There’s no point in speculating about a second aid programme for Ireland when the first one is “delivering”, European Commission spokesman Amadeu Altafaj told reporters in Brussels.

EU officials have emphasised that Greece’s circumstances are unique and do not presage bondholder losses in other nations that seek assistance. The swap proposed to investors would slice €100bn from the €205bn of privately owned Greek debt. The new bonds will be backed by €30bn of incentives, in the form of high-quality collateral issued by the euro area’s rescue fund.

After two years of wage cuts and tax increases, the IMF estimates Greece’s 2011 deficit at about 9% of gross domestic product, compared with 10.6% in 2010.

— Reuters