The current drama in Europe revolves around negotiations between Greece and its private sector bond holders. After several rounds of talks, Greece and its bond holders are reportedly close to a deal where creditors would take losses of 65% to 70% on their sovereign bonds.
Bloomberg is reporting that private bond holders (think banks and hedge funds) have made their “maximum offer” to Greek authorities and are now waiting for EU finance ministers to approve the debt restructure deal at their Monday meeting.
The goal of the debt restructuring is to reduce Greece’s overall debt-to-GDP ratio to a level of 120% by 2020. This is viewed by Eurozone leaders as a more manageable level than the current 160% ratio, which is seen as unworkable going forward. In short, if not corrected in some fashion, the Greek government would be insolvent.
Due to the massive level of public debt in Greece, the private sector is being asked to voluntarily take a hit on their bonds. The alternative is for the Greek government to simply do a “hard default” on the debt.
However, the bottom line is that Greece and its private creditors have not been able to finalize a deal as of yet. The goal was to have a deal in place before today's meeting of Eurozone finance ministers.
The latest report from Reuters, which cited officials close to the negotiations, says that the two sides are converging on a deal. The article noted that Eurozone ministers will decide on Monday what terms of a Greek debt swap they are ready to accept as a part of a second bailout package for debt-strapped country.
IMF Chief Christine Lagarde told CNBC on Monday that she believes a deal will get done. Lagarde’s added that, in her view, much of the current back-and-forth is simply part of normal negotiations.
Recall that there had reportedly been an agreement last week on a deal that would result in average bond yield of around 4%. However, this plan was killed by the IMF and Germany, who say that a lower rate of ~3.5% is needed to ensure that Greece's debt burden will be cut to manageable levels.
Reuters reports that a yield of 3.5% on the new bonds would create losses on a net present value basis of more than 70% for private bond holders. This of course, is above their stated maximum tolerance of 65-70%.
At stake in these negotiations is the second bailout deal from the troika of the EU/ECB/IMF. Recall that Greece needs to refinance €14.5 billion of bonds maturing in March. Markets believe that without the bailout money, Greece would be forced to default on this debt.
Stay tuned as markets may react to the ultimate outcome.
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