Talks over restructuring part of Greece's massive public debt ran into trouble on Tuesday as one fund walked away from negotiations, fuelling growing doubts about whether a deal that is crucial to a new bailout agreement can be reached this year.
Vega Asset Management, a Madrid-based fund, resigned from the steering committee representing private creditors negotiating a voluntary restructuring of Greek government bonds, two sources familiar with the situation said.
They said the disagreement stemmed from differences over how to proceed with a voluntary bond swap, although there were no more precise details. Vega, the only fund represented on the steering committee, declined to comment.
Greek Finance Minister Evangelos Venizelos put a brave face on the tense discussions, saying he was confident that negotiators were close to an agreement, but there was much less optimism from bankers who have been following the talks.
"I can't see any deal this year," said one senior banker with knowledge of the discussions.
Banks and funds have been negotiating with the government for weeks over the terms of an agreement under which they would accept a nominal 50 percent discount on their holdings of Greek bonds in return for a mix of cash and new bonds.
The arrangement is intended to cut Greece's debt by 100 billion euros, allowing it to bring its debt from 160 percent of gross domestic product to a still huge but more manageable 120 percent by 2020.
But discussions have been snagged over a series of conditions that will determine the actual cost to be imposed on the banks, including the coupon of the new bond, its maturity and the conditions of any guarantees.
Behind the arcane details, the issue is a pivotal element in a bailout deal that officials hope can prevent Greece from defaulting on its debt and triggering a wider emergency that could spill out of control, potentially threatening the entire euro zone.
One major deadline looms in March when Greece faces a 14.5 billion euro bond redemption and it will need new financing if it is to pay out on the bonds when they mature.
TIME RUNNING SHORT
With time pressing, the International Institute of Finance, the lobby group which is coordinating discussions for the banks, has been pushing for a quick agreement.
"The IIF wants to have a deal as soon as possible, they don't want negotiations to drag on for many weeks. But the Greek state is not ready yet to have substantial discussions about the rate and the maturities," said one banker, who is close to the discussions.
Among issues which remain to be sorted out are the interest coupon and the debt maturity, which will be key to determining the assets' Net Present Value (NPV), a measure that estimates the current value of the bonds' future cash flow.
Banks have complained that Greece wants to impose conditions that would produce a final net present value of 25 percent, which they say is far too low an offer.
Sources close to the talks say Athens has proposed a four percent coupon and a maturity of 30 years on new bonds that would be exchanged as part of a debt swap, while banks are pressing for an eight percent coupon and a maturity of 20 years.
However, while the NPV issue remains blocked, banking sources said that there had been progress on other issues, including whether guarantees for private sector creditors would be treated equally (or "pari passu") with creditors from the public sector.
The source also said it had been agreed that the new bond would be regulated not under Greek law but under English law, which provides for so-called collective action clauses allowing the terms of the bond to be changed after issuance.
Such a clause could be vital to securing an agreement that would bind all creditors to any new payment terms.
Despite the pessimism expressed by bankers, officials in Athens expressed confidence that a deal will be reached with one saying that the initial terms of the so-called Private Sector Involvement (PSI) were likely to be finalized by early January.
Speaking at a conference in the Greek capital, Venizelos also said a deal could be reached in time. "We are close to an agreement, I believe that," he said.