A crucial week of talks on the restructuring of Greece's debt passed with no agreement, and discussions appeared to languish over the weekend, leaving Greece in an uncertain state and with a loudly ticking clock.
Greek politicians and negotiators for the main Greek creditors' group, the Institute of International Finance, met into the wee hours of Saturday morning but came up with nothing. The IIF's two chief representatives left Athens later Saturday, for what their spokesman described as "longstanding personal appointments." It wasn't clear when they would return, although some discussions continued by phone over the weekend.
The impasse reflects the complexities of the giant restructuring—which proposes to cut around €100 billion ($129.3 billion) from Greece's €350 billion debt mountain—and the web of competing, colluding and diverging interests among the many parties to the deal.
Meanwhile, Italian Prime Minister Mario Monti on Sunday said the country is moving forward with plans to spin off Eni SpA's natural-gas business, adding that he has "very high" expectations that euro-zone countries will eventually agree to pool their debt through jointly issued bonds.
People close to the Greek talks, which are expected to continue in some form this week, said the largest hurdle is now the insistence of Greece's rescuers, the other euro-zone countries and the International Monetary Fund, on low compensation for creditors that participate in the restructuring. There is obvious sense in that: The rescuers, especially paymaster Germany, will be lending Greece the bulk of any money it gives as compensation to creditors. With their parliaments restive, Germany and its allies want the cost as low as possible.
So does the IMF, which has committed an unusually large sum to Greece and is wrestling with internal rules that prevent it from lending more to a country that has little realistic chance of reducing its debt to a controllable level.
The rough outlines of the restructuring are clear: Greek creditors who hold around €200 billion in Greek bonds will be implored to exchange those bonds for new ones with half the face value. The new bonds will also mature decades in the future, meaning those creditors bear the not-insignificant risk of lending money to Greece for a very long time.
To sweeten the deal, euro-zone countries will lend Greece roughly €30 billion that Greece will earmark for creditors. Discussions have centered on Greece using that money to dispense cash or high-quality short-term notes from the euro-zone bailout fund to creditors in lieu of some of the new bonds.
The people close to the talks said the creditors and Greece were close to agreement Friday on the interest rates to be paid to creditors on the new bonds, which would average just over 4%. But while Greece and its creditors are nominally the parties to the negotiation, Germany and the IMF have considerable weight. These people said both pushed for a lower coupon, with the IMF insisting it not exceed 3.5% on average.
No deal can go ahead without Germany's and the IMF's say-so. That is because Greece doesn't have the money on its own to provide the sweeteners. Nor, even after the restructuring, could it finance its hefty budget deficits and repay other debt not subject to the exchange without help.
The interest rate is crucial for several reasons. First, Germany and the other countries will have to lend money to Greece to pay it. The new Greek bailout currently being negotiated covers roughly the next three years of financing, and the rescuers would like the package to be as small as possible. Hence, negotiators have discussed a rising coupon that starts off low and gets higher in later years—beyond the horizon of the immediate bailout.
Second, a lower rate makes it more likely that Greece's debt will be bearable in the long term, a key issue for the IMF.
And for creditors, holding a Greek bond is risky. They thus want to get as much interest as they can, as soon as possible.
The progress, or not, of the Greek talks will be a central topic at Monday's meeting of euro-zone finance ministers in Brussels. The European authorities had wanted a restructuring deal to be in hand before the meeting, which would enable finance ministers to evaluate it. Now, the hope is that it will be complete before a summit of European leaders Jan. 30. But the delay has made the timetable very tight.
The package of sweeteners could well require another meeting of finance ministers to put in place, and the full new bailout perhaps another. Actually effecting the debt exchange will take several weeks, and Greece and the EU haven't yet approached what could be the toughest hurdle: Forcing reluctant creditors to accept the deal.
On March 20, Greece must repay €14.4 billion to bondholders. It doesn't have that money. Either the exchange is completed and those bondholders agree to—or are forced to—accept new debt that matures in a generation, or it isn't and the rescuers must decide whether to lend Greece money to repay or let the country default.
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