By Peter Spiegel, Quentin Peel and Alex Barker
Oct 22 2011
Charles Dallara, chief negotiator for the largest holders of Greek debt, said Saturday that while
Bondholders are prepared to take higher losses on their Greek debt, but they are far from a deal with European governments.
“Talks over Greek debt are continuing, but we are nowhere near an agreement,” Charles Dallara, chief negotiator for the Institute of International Finance, the largest holders of Greek debt, said on Saturday.
The Institute of International Finance, is only prepared to strike a deal only if it is accompanied by a credible plan to return the economy to growth “in order to reduce Greek dependence on European taxpayers and on private sector [losses].”
Mr Dallara’s hardline stance comes a day after government lenders said Greece’s economy had deteriorated so severely that bondholders must accept a 60 per cent cut in the value of their holdings in order to bring the second Greek bail-out back to the €109bn agreed in July. The report made clear European leaders would push Mr Dallara to accept losses far beyond the 21 per cent “haircut” agreed in July.
“It has got to increase massively,” Jean-Claude Juncker, the Luxembourg prime minister who chairs the group of eurozone finance ministers, told the FT.
Eurozone finance ministers met in Brussels on Saturday to give their lead negotiator, Italian treasury chief Vittorio Grilli, a mandate on Greek bonds to take to Mr Dallara, but the IIF’s resistance threatens to derail hopes of a reaching agreement on a second bail-out by Wednesday.
The possibility of stalemate came as European leaders struggled to agree on a range of issues aimed at solving the debt crisis.
There were signs of stalemate on tough new thresholds for European bank capital and a new, competing plan to increase the firepower of the eurozone’s €440bn rescue fund was thrown into the deliberations.
According to European officials, the new plan to enhance the European financial stability facility would include creating a special fund to attract private investors, that could be used to purchase Italian and Spanish bonds.
The new fund, which would be set up as a special-purpose vehicle, would use seed money from the EFSF and give private investors incentives to add cash by insuring them against losses. By adding private money, the EFSF would be able to leverage its assets to purchase more bonds than if it were to buy them directly.
“The principle that we leverage the EFSF with private money is being subscribed by everyone but the level of success is uncertain,” said Jan Kees de Jager, the Dutch finance minister. “How much can we raise, that is being looked at.”
The SPV option is being considered alongside a scheme that has long been viewed as the frontrunner, using the EFSF to guarantee bondholders against 20 per cent of their losses. One person familiar with the talks said the two options were not mutually exclusive and could be used in parallel.
Finance ministers from all 27 European Union countries met in between sessions of their eurozone counterparts on plans to recapitalise Europe’s banks. A deal was expected to be wrapped up on Saturday, but there were increasing signs of difficulties as negotiations stretched into the evening. George Osborne, UK chancellor, cancelled his afternoon flight home to stay for the talks.
According to European officials, several struggling countries – including Spain, Italy and Portugal – were resisting stringent new capital thresholds proposed by the European Banking Authority, the EU’s bank regulator.
The EBA proposal would require banks to temporarily raise their core tier one capital levels – the key measure of financial strength – to 9 per cent and mark down their holdings in sovereign debt to current market levels.
Because Spanish and Italian sovereign bonds have been under attack since August, and are mostly held by Spanish and Italian banks, Madrid and Rome have resisted since their banks would be required to raise the most capital.
Several European officials said the 27 finance ministers may be called back into session early next week to resolve the standoff.
Deliberations over all eurozone issues were expected to move to heads of government by Saturday night, when presidents and prime ministers from across the EU begin arriving ahead of a much-anticipated summit on Sunday.
George Papandreou, the Greek prime minister, was scheduled to meet José Manuel Barroso, European Commission president, on Saturday evening before Mr Barroso headed to a pre-summit gathering of centre-right leaders, including France’s Nicolas Sarkozy and Germany’s Angela Merkel.
Mr Barroso, Mr Sarkozy and Ms Merkel were then planning a pre-summit crisis meeting over dinner later in the evening with IMF chief Christine Lagarde, ECB president Jean-Claude Trichet, and European Council president Herman Van Rompuy.
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