Greece, private investors struggle to agree on high-stake debt deal

The Greek government and its private bondholders are locked in high-stake debt negotiations in Athens. If they fail to reach a deal, it could finally trigger the oft-predicted Greek default and cause huge problems for the eurozone.

In the proposed debt swap plan, private investors will write off a certain amount of the Greek debt they hold, known as a haircut. At an EU summit in October, leaders agreed to a target of 50 percent, with the rest to be paid out in a combination of cash and new bonds. Negotiations are held up over both the size of the haircut and the interest rate for new bonds. 

The participation of private creditors is a vital part of the international effort to save Greece’s economy from collapsing. Without it, the second bailout package for Greece, set up by EU and International Monetary Fund (IMF) and worth €130 billion ($169.5 billion), will not be paid out. On March 20, Greece has to pay back €14.5 billion ($18.4 billion) of bonds – money it does not have.

“The financial and political costs of a Greek default and subsequent departure from the eurozone by far outweigh the costs of keeping the country afloat,” says Thomas Klau, Senior Policy Fellow at the European Council on Foreign Relations in Paris.

Greek Prime Minister Lucas Papademos and Charles Dallara, director of the Institute of International Finance (IIF), which represents Greece’s private creditors, are also trying to agree on the interest rate for the new bonds. Greece has offered an average rate of 3.5 percent, while the IIF is asking for a minimum of 4 percent.

If the deal goes ahead, it would cut about €100 billion ($129 billion) off Greece’s €350 billion ($451 billion) debt load. But the involvement of private creditors – pushed for mainly by Germany – is voluntary and it's unlikely all of them will agree to the haircut. Several European banks holding Greek bonds are reluctant to accept such a large write-off, as are hedge funds that bought Greek bonds cheaply and are hoping to cash in on Credit Default Swaps (CDS) they purchased, which pay out when a debtor defaults.

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