Financial Times
October 26, 2011
The package that eurozone leaders finalised on Wednesday attempted to reconcile two seemingly irreconcilable demands – putting Greece on a sustainable path by cutting payments to bondholders, while preventing the move from sparking contagion throughout the continent.
To make Greek debt sustainable, eurozone leaders have, after 18 months, finally decided that only through swingeing cuts in bond repayments will Greece ever be able to climb out of its €350bn debt hole.
But in order to prevent triggering default insurance policies, known as credit default swaps, or CDS – which would spread contagion by calling into question exactly which financial institutions would have to pay out – they must reach a deal with bondholders voluntarily.
Talks with bondholder representatives to get a voluntary deal dragged late into the night, and senior officials said a resolution in time for the summit’s conclusions was unrealistic.
One senior government official said a broader meeting of Greek bond investors, to be held in Athens in the coming weeks, may be the place to revisit the question because talks with the Institute of International Finance – the consortium of banks leading negotiations in Brussels for bondholders – were inconclusive. The official said eurozone leaders were even contemplating changing Greek laws governing its bonds to make sure a so-called “credit event” did not occur.
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