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Talks about forgiving Greek debt proving difficult

By Gabriele Steinhauser
AP Business Writer / December 16, 2011
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BRUSSELS—Private creditors are balking in talks about forgiving euro100 billion ($130 billion) in Greek debts, European officials warned Friday, just as negotiations heated up on the debt restructuring that aims to save Athens from bankruptcy.

European and Greek negotiators met with representatives from banks and investment funds Friday in Paris, after holding talks earlier this week in Athens.

They were trying to work out the terms under which private creditors are willing to exchange their existing Greek bonds for new ones with a lower face value.

The swap, which was meant to go ahead in early 2012, is supposed to reduce Greece's debt to 120 percent of gross domestic product by 2020. Without a restructuring, Greece's debt load would reach almost 200 percent of GDP by the end of 2012.

The concept behind the debt forgiveness is that getting back half of one's investment is better than the much bigger losses bondholders would likely face if Greece defaults. A deal with private creditors to share the burden of digging Greece out of its financial hole is key to a second, euro130 billion ($169 billion) bailout for Greece from the International Monetary Fund and other eurozone countries.

But some investors had taken out insurance on their Greek bond holdings, and if they voluntarily agree to the swap, they will not receive the insurance payments they would have if Greece had just defaulted. Others, who may have bought the bonds at already depressed prices, may be willing to take a gamble in the negotiations and try for a bigger payout.

"They are not making it easy, to say the least. It will take time," said one European official. "They are trying to reopen things" that were already considered decided, the official added, without providing details.

A second European official confirmed that a final deal on the debt relief was still elusive. Both spoke on condition of anonymity because the talks are going on behind closed doors.

The cautioning words from the two officials came as Greek Finance Minister Venizelos told the Greek parliament he was confident the debt writedown would go ahead.

"I believe we will achieve that because I have positive signs from the consultations and the course of the discussions," Venizelos said Friday. "That would offer the Greek people ... a return for its sacrifices and a prospect for younger generations."

The 17 nations that use the euro and bank representatives reached a deal to reduce Greece's debts in late October after determining that the struggling country would not be able to repay them in full.

However, the Institute for International Finance, which has been leading the negotiations, has insisted that actual losses for investors have to be kept as low as possible for them to agree to participate voluntarily.

To keep overall losses under control, private creditors are pushing for higher interest rates from Greece and expensive collateral to secure the new bonds. That, in turn, could eliminate much of the benefits to Greece of a cut in the bonds' face value. Of the euro130 billion in the second bailout for Greece, euro30 billion ($39 billion) is meant to provide collateral for the bond swap.

In a statement following Friday's talks, the IIF said "the private sector welcomed the willingness of the authorities to work on means to enhance the quality of the exchanged debt" -- shorthand for the collateral provisions.

It said the talks had made progress "and both sides agreed to continue their effort to find a voluntary solution that would help put Greece on a path of debt sustainability and economic recovery."

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Nicholas Paphitis in Athens contributed to this story.

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