“That is essentially the area where the differences are substantial,” Mr. Dallara said. “They are looking at the private sector to accept interest rates that they would not accept (themselves), which is completely unreasonable.”
One banking source said official sector creditors had asked for a coupon of less than 4 per cent, irking banks for whom it would have meant losses of over 75 per cent on the bonds.
A second source involved in the discussions said the troika had pushed for a coupon of 2 per cent to 3 per cent that banks deemed unacceptable, below the 4-per-cent level that Greece and France proposed. Banks considered a 4- to 5-per-cent coupon sustainable for Greece, the source said.
Without a more palatable offer, the level of participation among private creditors could slip to below the level needed to ensure the deal is considered voluntary, the source said.
“They’ve got to understand that a voluntary exchange has got to be something we can stomach,” said a third source close to the talks.
A fourth source said the banks were ready to strike a deal if they reached common ground with the EU, IMF and ECB.
Changing assumptions about the economic outlook was not helping the situation either, Mr. Dallara said.
Underlining the precariousness of the situation, British finance minister George Osborne warned uncertainty over fixing Greece’s debt crisis was more of a threat to Europe’s stability than the downgrade on Friday of nine euro zone countries’ credit ratings by S&P.
The downgrades were largely expected and traders said pressure on Italian and Spanish bond yields on Monday were offset by the ECB stepping in to buy the bonds.
In its fifth year of recession, Greece has repeatedly flirted with bankruptcy in recent months, with only bailout loans from European partners and the IMF, agreed on condition of unpopular austerity measures, preventing a default.
The latest impasse in talks has prompted fears that Greece may need further financial support to put its debt on a viable footing. Mr. Papademos played down speculation that Athens would need additional aid to that agreed in October.
“I think the funds that have been pledged at the Euro Summit, combined with the outcome of the private sector involvement process should be sufficient in order to support financially the Greek economy,” Mr. Papademos said.
Pledging more funds to Greece would be politically tricky for many euro zone countries struggling with economic problems of their own. Germany’s foreign minister, on a trip to Athens, warned Greece must show it was honouring its end of the deal.
“We don’t want only a hint of a temporary recovery supported by banknotes,” German Foreign Minister Guido Westerwelle said in an interview to be aired on Greek Skai television later on Monday. “We want structural reforms so that Europe does not face a similar situation in the future.”
