January 22, 2012
Talks between Greece and its private-sector creditors over a debt write-down plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.
Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout that will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released.
Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens on Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.
The two sides had appeared to be closing in on a deal that would give creditors new bonds paying a 3.5% coupon for shorter maturities and rising to a cap of 4.6% on longer-dated bonds. The average coupon would amount to around 4%.
But people familiar with the matter said that the IMF and Germany were pushing for a lower rate, concerned that Greece's debt wouldn't return to sustainable levels if the average coupon on the new bonds was around 4%.
"Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.
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BREAKING NEWS: On February 31, 2012, after seemingly endless negotiations with creditors, all international holders of sovereign Greek debt will announce unanimously that they will forgive Greece 100% of her sovereign debt. Their official rationale will be: "If we keep spending all our energies on 3% of the Eurozone's GDP (without really accomplishing anything), we will neglect the other 97% of the GDP and the cost of that will be much higher than forgiving Greece all her sovereign debt now".
This means that the central government of Greece will no longer have any foreign debt. The domestic debt of the central government remains unaffected by this. Consequently, Greek banks, pension funds, insurance companies, etc. can remain hopeful that their loans to the central government will be paid.
Some time during March 2012, Greece will discover that things haven't really changed that much. Even though the government now has to pay much less interest than before, it still requires new financing in order to pay all the bills. They cannot raise this new financing in international markets because part of the 100% haircut deal was that Greece would no longer request financing in international markets until the country had regained creditworthiness.
At the same time, the banking sector begins having severe liquidity problems. Part of the 100% haircut deal was that the ECB insisted on freezing its lending to the Greek banking sector. They would not cancel their outstanding loans but neither would they extend new loans.
The banking sector loses well over 1 BN EUR per month in liquidity because import payments exceed foreign revenues from exports and services by that amount. Also, capital flight continues draining the banking system of another 1 BN EUR per month (or more!).
With new capital inflow from abroad to finance these deficits having come to a halt, the government has no choice but to take dramatic actions: imports taxes and capital controls are implemented and the government issues a new bond whose purchase is mandatory for all domestic savers. This bond serves to finance the continued budget deficit and to provide liquidity to the banking system.
http://klauskastner.blogspot.com/2012/01/default-seems-to-be-approaching-if.html
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