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live The voluntary nature of the Greek debt haircut is under question

13 January 2012 / 20:01:42  GRReporter
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The negotiations between the Greek Government and the Institute of International Finance are temporarily suspended, the Executive Director Charles Dallara is expected to return to Athens on Wednesday, 18 January.

Despite the optimism of the Greek Minister of Finance Evangelos Venizelos, the negotiations with private creditors for the voluntary haircut on the Greek debt have blocked. Charles Dallara left Athens without reaching an agreement on the conditions under which private creditors would write off 50% of the nominal value of bonds. "Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach. We very much hope, however, that Greece, with the support of the Euro Area, will be in a position to re-engage constructively with the private sector with a view to finalizing a mutually acceptable agreement on a voluntary debt exchange," reads the official release of the Institute.

France Press Agency, citing an independent source involved in the negotiations, reports that they were held under "extreme pressure". The same source recommends that all negotiating parties should "realize how serious the situation is in order to avoid the worst." Mega TV correspondent in Washington Michalis Ignatiou reported that Charles Dallara will return to Athens, probably on Wednesday, but authorized experts will come before that to prepare the ground for a possible continuation of negotiations.

If private creditors do not agree to be involved voluntarily in the 50% cut of the Greek debt, the Greek government is entitled to trigger the so-called Collective Action Clauses, which will require private creditors to agree. In this situation, however, it is very likely that the cut will be considered a credit event, or default in other words, and then the CDS mechanism of insurances against default will be activated.

The PSI + or Private Sector Involvement is the second procedure for the cut of the Greek debt. Private creditors wrote off 21% of the debt with the first one. Now, they are required to give away 50% of the face value of the bonds they hold but their absolute losses will be about 70%. The most likely reason for the suspension of negotiations is the interest rate of the new bonds, which are to replace the existing ones. Private holders insist on an interest rate of around 5.5%, while Athens is inclined to give them not more than 4%. The maturity of the new bonds will be 30 years and they will be registered under the British law.

In case of failure of the negotiations with private creditors, Greece has two options - to get even higher aid from institutional lenders - the European Union and the International Monetary Fund or declare bankruptcy. The maturity of several large packages of Greek securities is in 2012 but the troubled Mediterranean country has no cash to pay them.

Tags: Charles Dallara Institute of International Finance PSI Debt haircutVoluntary nature
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