Eurozone finance ministers early yesterday set the stage for further tough negotiations with private bondholders over how to cut Greece’s massive debt pile, by setting a low limit on the interest rate the country will pay on new lower-valued bonds.
The interest rate is the key remaining variable in a complicated debt swap designed to slice about 100 billion euros (US$130.2 billion) off Greece’s massive debt pile and bring it down to 120 percent of GDP by 2020.
The eurozone believes that a debt level of 120 percent of GDP is the maximum that Greece can handle over the long-term. Without a restructuring, the country’s debts would hit close to 200 percent of GDP by the end of this year.
After 10 hours of talks, Luxembourg Prime Minister Jean-Claude Juncker, who also chairs the meetings of eurozone finance ministers, said that the interest rate on the swapped Greek bonds will have to average “clearly below 4 percent” over the lifetime of the bonds. In the period before 2020, the average interest rate will be less than 3.5 percent, he added.
Those caps are far below interest rates demanded by Greece’s private creditors, who already have to give up on 50 percent of the face value of their investments and are expected to give the country between 20 or 30 years to repay them.
By setting the low interest-rate caps, the ministers made clear that they are not willing to increase their rescue loans to Athens beyond the 130 billion euros tentatively agreed in October, but their tough position will also test the willingness of private creditors to voluntarily agree to the Greek debt relief.
The alternative would be for the eurozone to force losses on the private bondholders — a move that the it has been reluctant to make.
Greece, the eurozone and the private bondholders don’t have much time left to sort out their differences. On March 20 Athens has to repay 14.5 billion euros in expiring bonds — money it does not have. If the bond swap is successful, that amount would not only be cut in half, but the repayment deadline would be pushed far into the future.
A Greek government official said on Monday night that his country wants to present a final offer to its bondholders by Feb. 13, since it will take several weeks to find out how many of them are willing to participate voluntarily. Greek Prime Minister Lucas Papademos has said he is open to force losses on holdouts if a majority of bondholders agree to a restructuring.
However, the low caps on the interest rate will make it more difficult to get a large number of private creditors to sign up to the final deal.
On Sunday, Charles Dallara, who has been leading the negotiations on the debt swap for bank lobby group the Institute of International Finance, said he had already presented Athens with “the best possible” proposal on the debt writedown.
“Our offer that was delivered to the prime minister is the maximum offer consistent with a voluntary PSI deal,” Dallara told Greece’s Antenna TV. “We are in a crossroads. Either we choose a voluntary debt restructuring [or] the alternative is to choose the path of default.”