Greek debt deal hinges on interest rate impasse

@CNNMoneyInvest January 24, 2012: 8:38 AM ET
Greek debt talks are progressing but disagreements remain over the interest rate private sector investors will get on a debt swap.

Greek debt talks are progressing but disagreements remain over the interest rate private sector investors will get on a debt swap.

NEW YORK (CNNMoney) -- Greece and its creditors in the private sector are grappling over a key detail of a deal aimed at reducing the nation's overwhelming debt load, according to a top eurozone official.

Disagreements remain over the interest rate private investors will be paid on new bonds they receive in exchange for existing Greek government debt, said Jean-Claude Juncker, who heads the Eurogroup of finance ministers from the 17 nations that use the euro.

But progress has been made on other important aspects of the overall response to the European debt crisis.

Speaking early Tuesday in Brussels, Juncker said the ministers welcomed the "increased convergence" between Greece and its private sector creditors on a crucial debt restructuring.

He said the ministers have asked Greek officials to reach an agreement "in the next few days" on the terms and conditions of the agreement with the Institute of International Finance, which represents Greek bondholders.

Under a deal reached in October, private sector investors and banks agreed to voluntarily accept a 50% writedown on the value of Greek government bonds. In addition, investors agreed to exchange Greek bonds for new securities with longer maturities and lower interest rates.

The aim is to reduce the nation's debt load to 120% of economic output by 2020, from about 160% currently.

The European Union has stipulated that the interest rate on the new bonds must be "clearly below 4%" in order for Greece to reach its long-term debt reduction target, said Juncker. But the terms being discussed imply interest rates "well beyond 3.5% before 2020," he added.

"So negotiations will have to be resumed on that accord," said Juncker. "We don't have a final picture of the PSI [private sector involvement] related issuance."

The ministers also called for the swift implementation of a second bailout program for Greece. Officials from the European Union, International Monetary Fund and the European Central Bank arrived in Athens last week to review the nation's finances and begin negotiating the €130 billion program.

"For every one of us, the future of Greece is clearly in the euro area," said Juncker.

During a separate press conference in Brussels early Tuesday, European Commmission vice president Olli Rehn said progress has been made on the debt talks.

"The building blocks are there to reach an agreement shortly," he said "The talks have progressed well and they are close. It is better to do in January than in February."

Meanwhile, the ministers reported progress on other fronts, including the construction of a so-called financial firewall and the details of a proposed fiscal compact.

Juncker said the Eurogroup has finalized a treaty that would allow the European Stability Mechanism, a permanent bailout fund, to be implemented in July, well ahead of schedule.

The €500 billion ESM would be able to run along side the €440 billion European Financial Stability Facility through 2013, he added.

Klaus Regling, who heads the EFSF, said the recent downgrade by Standard & Poor's of the fund's long-term credit rating would not impact its ability to meet current and future commitments.

Regling also said efforts to leverage the fund's resources have moved forward.

A plan to partially insure government bonds issued by troubled euro area nations should be launched later this month, while a special investment vehicle designed to attract outside capital will be ready soon, he said.

The first phase of the bond insurance scheme has already attracted €60 billion from outside of Europe, said Regling. The second phase will be finalized in February. "I'm confident that the scheme, when needed, will be launched and will attract substantial funds," he said.

A world in chaos? That may be a good thing.

The ministers also made progress on the details of the fiscal compact that eurozone political leaders agreed to late last year that is expected to be signed in March, said Juncker.

The compact aims to increase fiscal discipline across the eurozone. It includes legally binding balanced budget requirements, automatic correction mechanisms and new sanctions for member states that fail to comply with deficit rules.

The ministers praised the efforts of Italian prime minister Mario Monti to stabilize his government's finances and restructure the nation's economy. They also called on the Spanish government to implement planned budget reforms as soon as possible.

"While last year was the year of containing the crisis, this year must be the year of resolving the crisis and bringing the European economy back on the path of sustainable growth and job creation," said Rehn.

-- CNN's Jim Boulden contributed from London To top of page

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