Greece must urgently break a deadlock in debt swap talks triggered by "unreasonable" demands from its partners, the head of a group of representing its private sector warned on Monday, as Athens raced against the clock to prevent an unruly default.
Barely a month after an injection of bailout funds helped to avert bankruptcy, Greece is back at the centre of the eurozone crisis as fears of a default and a subsequent eurozone exit overshadow a mass credit downgrade of eurozone countries. Cash-strapped Athens needs a deal with the private sector within days to avoid going bankrupt when 14.5 billion euros of bond redemptions fall due in late March.
But talks with its creditor banks broke down on Friday over the interest rate on new bonds Greece will offer and a plan to enforce investor losses. Negotiations were suspended until Wednesday, and Athens sent senior officials to Washington to consult with the International Monetary Fund. With a growing number of experts - including a senior Standard & Poor's official - warning a Greek default was on the cards, the country's creditors expressed alarm.
"There is an urgent need for agreement to inject an element of stability," Charles Dallara, head of the Institute of International Finance who represents Greece's private creditors, told Reuters. He said banks were "very surprised" at "completely unreasonable" interest rates offered to them. Greece put a brave face on the stand-off. "There is a little pause in these discussions," Greek Prime Minister Lucas Papademos told CNBC television.
"But I am confident that they will continue and we will reach an agreement that is mutually acceptable in time." He expressed optimism that talks on both the debt swap and the latest bailout would be completed in two to three weeks. But Athens is quickly running out of time on the bond swap front. A deal must be sealed before senior inspectors from the EU, IMF and ECB "troika" arrive in Athens at the end of the week to agree details of a second, 130-billion-euro bailout.
Furthermore, an agreement in principle is needed by the end of this week if it is to be finalised in time for the March bond redemptions, Dallara said. Banking sources say Athens is not the problem in the talks, pointing the finger at terms insisted on by the so-called troika of EU, ECB and IMF lenders keeping Greece afloat with aid. In a bid to resolve the impasse, a government source said the head of Greece's debt agency and a senior adviser were travelling on Monday to Washington to meet IMF officials - just a day before a team of technical experts from the troika arrives in the Greek capital.
Underscoring the stakes involved, a senior S&P official told Bloomberg Television that Greece would default "very shortly". "Whether there will be a solution at the end of the current rocky negotiations I cannot say," said Moritz Kraemer, the head of the agency's European sovereign ratings unit. Earlier on Monday, Bill Gross, the manager of the world's largest bond fund PIMCO, tweeted that a mass credit downgrade had made investors "aware" that countries can default - and that Greece would be the next to do so.
Under the bailout terms agreed in October, Greek privately held debt would be reduced by half so that, together with structural reforms, the overall debt-to-GDP ratio of Greece would fall to 120 percent in 2020 from 160 percent now.
After initial optimism last week that a deal was near, negotiations stalled on Friday over the interest rate Greece must pay on new bonds it offers. "That is essentially the area where the differences are substantial," said Dallara. "They are looking at the private sector to accept interest rates that they would not accept (themselves), which is completely unreasonable."
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