Papademos Says Greece’s Creditors Could Be Forced to Take Losses

By RACHEL DONADIO Published: January 17, 2012

Prime Minister Lucas Papademos of Greece in his office. The debt crisis has occupied him since he took office in November. /Eirini Vourloumis for The New York Times

ATHENS — Taking direct aim at hedge funds and other private holders of Greece’s debt, Prime Minister Lucas Papademos says he will consider legislation forcing the creditors to take losses on their holdings if no agreement can be reached in critical negotiations scheduled to resume Wednesday.

Related

• As European Union Beckons, Allure Fades for Wary Croatia (January 18, 2012)

• European Central Bankers Criticize Role of Rating Agencies (January 18, 2012)

• As Reforms Flag in Greece, Europe Aims to Limit Damage (January 16, 2012)

• Inefficient Economies Seen as Drag on Europe (January 16, 2012)

• Times Topic: Greece

In a wide-ranging, 90-minute conversation on Monday night, his first with a newspaper since he came to office in November, Mr. Papademos also called on Greek politicians to pass the economic measures demanded by Greece’s foreign lenders in exchange for bailout aid, saying vested interests with political ties had helped to block the changes needed to revive the country’s rigid and moribund economy.

But he added that European leaders did not act swiftly enough to tackle the debt problem when it first arose in early 2010. And he said Greece’s foreign lenders should have introduced growth measures earlier in its program for the austerity-squeezed country, whose economy is expected to shrink by 6 percent this year and where unemployment is 18 percent and rising.

Mr. Papademos’s most pointed remarks appeared aimed at the private bondholders who have increasingly more sway over Greece’s fate than do its politicians or even the prime minister.

Mr. Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down $130 billion from Greece’s unwieldy $450 billion debt, the country would consider passing a law to require holdouts to take losses.

“It is something that has to be considered in the light of expectations about the degree of the participation to be achieved,” Mr. Papademos said. “It cannot be excluded. It is contingent on the percentage.”

The prime minister is a former vice president of the European Central Bank, a nonpolitician brought in to lead an interim government with a mandate to secure new bailout funding as part of a new loan agreement.

His comments came after talks broke down last week between Greece and its creditors over the terms of a “voluntary” default, in which the private bondholders will agree to a 50 percent reduction or more in the value of their holdings. The so-called troika — comprising the European Central Bank, the European Union and the International Monetary Fund — has demanded such a deal as a condition to extending more aid.

Many private investors, like hedge funds, pension funds and banks, would just as soon see an involuntary default, because much of their holdings are insured through credit default swaps.

But European leaders are dead set against such a “credit event,” which could ignite a chain reaction with unpredictable and potentially catastrophic results for the world financial system.

However, the prime minister said he expected the talks to be completed successfully. “The talks are not straightforward, because they aim at a voluntary restructuring of public debt, and to achieve a number of objectives simultaneously, objectives that involve trade-offs,” Mr. Papademos said. “Taking into account the complexity of the exercise, I would say that we are very close to reaching an agreement.”

There is a growing sense in Europe that a Greek default cannot be avoided, if not now then perhaps in March, when a bond comes due that the country cannot pay without more financing from the troika. “I am aware of that,” Mr. Papademos said, adding that he thought the new financing would be approved. “I think the facts reveal that the European partners have taken extraordinary measures to help Greece address its problems.”

In conversation Mr. Papademos, who lived in Frankfurt and served as a vice president of the European Central Bank from 2002 until his retirement in 2010, is a true technocrat — quiet, polite, measured, rational. Unlike his technocratic counterpart, Prime Minister Mario Monti of Italy, who has acute political instincts and appears to thrive in the Italian political circus, Mr. Papademos is clearly ill at ease with the thrust and parry of political life.

He has not yet held a news conference in Greece, and was taken aback by a reporter’s questions about how the crisis had affected his friends and family or where he kept his personal savings.

“I have moved absolutely nothing out of Greece,” he said.

He bristled at the suggestion that he was out of touch. “I am fully aware of the adjustments that are needed and of the sacrifices being made by the people. You don’t only have to look at the numbers, the fact that the unemployment rate is 18 percent. You can walk in the city and see.”

He asked Greeks to put their sacrifices in perspective. If all goes well, he said, they could expect “an end to austerity” next year. He added that the tough measures were aimed at ensuring Greek wage stability in the future, including for low-income wage earners.

Mr. Papademos has not gotten a lot of help from his own government, which so far has failed to pass or carry out legislation required by the troika in exchange for more financing. But experts say that Mr. Papademos is doing his best considering the situation he inherited.

“I’m not suggesting there has been a revolution, but I think there’s a slow change,” said Loukas Tsoukalis, the president of the Hellenic Foundation for European and Foreign Policy, an Athens research institute. “Greece is showing enormous difficulty and reluctance in going ahead with reforms, and very often reluctance in implementing what has already been passed — but it is moving slowly.”

But timing is everything. Mr. Papademos said his mandate was to secure a new bailout and new loan agreement, not to solve all of Greece’s problems, and that his government would be short-lived.

“I would say the baseline scenario is for elections to be held sometime in April,” he said.

Until then, he added: “I am confident that we can overcome this crisis, provided that we remain united in our effort to address our debt and competitiveness problems. And I think that the Greek people are united; it’s important also that the political forces are united in line with the will of the Greek people.”

Papademos Says Greece’s Creditors Could Be Forced to Take Losses - NYTimes.com