Anti-austerity protestors march in Athens last week.
Greece's major bank creditors are edging closer to a deal on a debt swap that would saddle them with heavy losses, but would buy Athens more time and bailout money to stave off financial collapse.
The European Union made the voluntary private-sector debt haircuts a condition for Greece to receive further rescue funds in the latest package approved in July. But the clock is ticking.
The prospect of a Greek bankruptcy and messy default on its massive public debt has sparked fears of European bank failures and another Lehman-like meltdown of the global financial system.
Unless negotiators for the government and creditors wrap up a deal within the next two weeks, Athens may not get the money it desperately needs in time to meet €14.5-billion ($18.8-billion) in bond repayments due March 20.
"Talks with private creditors are without a doubt at a very sensitive stage," Greek Finance Minister Evangelos Venizelos told parliament before talks resumed Wednesday. Negotiations broke down last week, largely over differences on the interest rate to be paid on new bonds and other conditions, including the size of the haircut the holders will have to accept.
This has jumped to about 68 per cent from an earlier proposal of 50 per cent, as the Greek government's financial condition has deteriorated markedly. As recently as July, the drop in value was calculated at 21 per cent.
"Getting 32 per cent of par for Greek holdings is a huge hit for investors, although the market is already well through these levels" ING debt markets strategist Padhraic Garvey said in a note. Greek bonds of most maturities trade in the 20- to 25-per-cent range.
Creditors argue that their loss in terms of present value would be as high as 80 per cent.
But they have little choice if they want to avoid a messy bankruptcy and much steeper losses, analysts say. And even then, this may be only a temporary speed bump on a road leading to Greece's eventual failure.
The creditors participating in the talks account for slightly more than €150-billion worth of Greece's €260-billion in debt outstanding. About €50-billion of the remaining total is in the hands of insurers, hedge funds and other speculators, who have shown no inclination to take any sort of voluntary cuts. But Athens is exploring ways to get them on board, including legislation that would require a minority of holders to accept the same terms as the majority.
Such a move would face stiff challenges and would also likely trigger credit default swaps tied to the debt, which European leaders and the European Central Bank have been desperately trying to avoid. That's because of the stiff balance-sheet writedowns that would ensue from a formal default. The ECB itself is sitting on about 18 per cent of Greek bonds. As long as there is no formal default, it can carry the debt at face value. Some speculators jumped into Greek debt specifically to collect on CDS bets and would love to see such an outcome.
"The alternative [to a negotiated deal]may be worse, and they very clearly are going to have to take some kind of a big loss on these bonds," said Carl Weinberg, chief economist with High Frequency Economics.
A voluntary restructuring ensures that losses are limited in size and scope. But a bond default in March would require all creditors to write down their holdings to zero or "plausible recovery value," Mr. Weinberg said in a note. "We cannot rule out the possibility that many banks, including all the banks in Greece … and perhaps some non- banks – might be made insolvent."