Greek bankruptcy threat looms as debt restructuring talks break down

Helena Smith in Athens The Guardian, Saturday 14 January 2012

Athens warns of dire consequences for Greece and rest of Europe if deal with private-sector creditors is not reached soon

Greece's finance minister, Evangelos Venizelos, says he expects the talks with creditors to reconvene next week. Photograph: Aris Messinis/AFP

The unexpected breakdown of crucial talks between Greece and its private-sector creditors took the country a step closer to bankruptcy on Friday.

Officials in Athens warned of dire consequences for "Greece and the Greek people, Europe and Europeans" if the long-overdue debt restructuring deal were not sealed soon. The breakdown was attributed to disagreement over interest payments on the new bonds.

"No one should be under any illusion that this would be the worst possible outcome for everyone involved," said one insider, describing the talks as very tense. "The results would be catastrophic, and not only for Greece or Europe."

With Greece facing massive debt repayments on 20 March, the agreement is vital for averting disorderly default. The bond swap deal, which aims to cut Greece's debt pile by €100bn (£82bn), is also a condition for freeing up €130bn of further rescue funds for the near-insolvent nation. Greece's credit rating did not change last night 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 late on Friday.

"We are fully aware of how critical the situation is. Until these negotiations are completed, we face dire economic dangers."

The Washington-based Institute of International Finance (IIF), representing global bond holders, released a statement shortly after the breakdown saying the discussions had "paused for reflection".

The institute, which is negotiating on behalf of the banks, insurers, hedge and pension funds that have bought up Greek debt, said: "Despite the efforts of Greece's leadership, the proposal put forward, which involves an unprecedented 50% nominal reduction of Greece's sovereign bonds in private investors' hands … has not produced a constructive consolidated response by all parties.

"We very much hope, however, that Greece, with the support of the euro area, would be in a position to re-engage constructively with the private sector with a view to finalising a mutually acceptable agreement on a voluntary debt exchange."

The Greek finance minister, Evangelos Venizelos, said he expected the talks to reconvene on Wednesday when Charles Dallara, the IIF's head, returned to the capital.

Some analysts attributed the breakdown to tactics as both sides tried to clinch a deal.

Greek officials had earlier expressed optimism, saying an agreement outline would be in place by the end of next week.

It had been hoped that the discussions would be concluded by the time monitors from the International Monetary Fund, European Central Bank, and EU – the "troika" of Greece's bailout lenders – arrived in Athens on Tuesday. The second rescue package of €130bn rests on their evaluation of the nation's fiscal progress.

Aides close to Papademos, who had personally overseen the talks, viewed the deal as critical to unlocking further aid.

The debt restructuring, the largest attempted in the eurozone, will bring Greece's debt load to more sustainable levels, reducing it from 160% of GDP to 120% of national output by 2020. Officials in countries such as Germany, which has bankrolled Greece's rescue programmes so far, said the debt deal would make the prospect of a second bailout more palatable for taxpayers already incensed at having to dig into their pockets for what they see as profligate southern Europeans.

In talks next week inspectors from the EU, IMF and ECB are likely to make clear that they want to see agreement on the debt deal before discussing further aid.

Athens desperately needs the money to keep afloat. Failure to cover €14.5bn in maturing bonds in March will automatically lead to default, the first by a western nation in nearly 70 years. The hugely sensitive nature of the negotiations mean that they are unlikely to end once an agreement is agreed.

"Each of the private investors will need to agree on implementation separately, which will also take time," a government official said. "We are very close to the wire. The deal needs to be done and dusted so we don't run out of time."

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