Greek Talks Stumble Over Interest Rates

New York Times
January 22, 2012

Talks between Greece and its private-sector creditors over restructuring its debt hit a snag over the weekend over how much of an interest rate the new bonds would pay.

While considerable progress has been made, Greece’s financial backers — Germany and the International Monetary Fund — have been unyielding in their insistence that the longer term bonds that would replace the current securities must carry yields in the low 3 percent range, officials involved in the negotiations said on Sunday.

Bankers and government officials say they still expect a deal to get done; Greece and its private-sector creditors on Friday appeared close to a deal that would bring the yield to below 4 percent. But the continuing disagreement over the interest rate is a reminder of just how complex and politically sensitive it is to restructure the debt of a euro zone economy.

Greece’s private creditors, who hold about 206 billion euros in Greek bonds, are resisting accepting a lower rate. They argue that they are already faced with a 50 percent loss on their existing bonds and that the lower rate would increase the hit they would take.

It would also make it more difficult to describe the deal as voluntary. A coercive deal, bankers warned, could lead to a technical default and the triggering of credit-default swaps, or insurance, an outcome that all sides were trying to avoid.

The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy.”

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