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European finance chiefs pushing Greece's private creditors to take bigger losses on bonds
BRUSSELS (AP) ' European finance chiefs piled pressure on Greece's private creditors on Monday to voluntarily cut the country's massive debt load, with the Dutch minister warning the bondholders may be forced to take losses.
Negotiations with the banks and other investment firms to reduce Greece's debt by some euro100 billion ($129 billion) hit an impasse over the weekend, even though time to avoid a potentially disastrous default is running low.
Under the deal, private creditors would swap their old Greek bonds for ones with a 50 percent lower face value. The new bonds would also have much longer maturities, pushing repayments decades into the future, and a much lower interest rate than Greece would currently have to pay on the market.
The Greek government and representatives for the private creditors are moving closer to a final deal ' the mood in financial markets was upbeat on Monday, with the euro, stocks and bonds all rising.
But the issues that need to be resolved ' above all, the interest rates on the new bonds ' are crucial for the deal to be effective.
If the interest rate is too high, a second, euro130 billion ($168 billion) bailout for Greece may not be enough to put the country back on its feet. Several eurozone states and the International Monetary Fund would have to provide more loans, but they are unwilling to do so.
It's clear that Greece needs some form of deal ' it faces a euro14.5 billion ($19 billion) bond repayment on March 20, which it will be unable to afford if the bond swap doesn't go through.
As that deadline nears, Dutch Finance Minister Jan Kees de Jager warned that bondholders may be forced to take losses if not enough of them agree to cut their holdings voluntarily.
"We've never pushed for a default, but we've never said it (a restructuring) must be voluntary," de Jager said as he arrived for a meeting with his eurozone counterparts in Brussels. "Our goal is a sustainable debt. It has our preference if it's voluntary, but it's not a precondition for us."
His comments illustrate that Greece's bailout rescuers, the euro partners and the IMF, may have hit a wall in their effort to get private creditors to bear the cost of saving the country. They need Greece's debt to be reduced to a sustainable level so the country can start focusing on getting its economy to grow again and eventually repay billions in rescue loans.
But the kind of losses that are necessary for that are likely too high to get enough bondholders to participate voluntarily ' especially hedge funds and other high-risk investors who bought their bonds at an already low price or stand to profit from default insurance they hold.
A forced restructuring would likely trigger payouts on so-called credit default swaps ' a derivative contract traded between banks and other investment firms that want to hedge against potential defaults. Because the market in CDS is obscure ' with no clear data on who would owe whom how much ' the eurozone fears that a payout could lead to turmoil on financial markets similar to what happened after the collapse of U.S. investment bank Lehman Brothers in 2008.
Although officials, including the French and Greek finance ministers, insisted that a deal was in the making, few expected a final agreement ahead of a key summit of EU leaders next Monday. De Jager suggested that negotiations may even drag on beyond that.
The debt writedown is a key part of Greece's second international bailout, tentatively agreed in October. Since May 2010, the country has been surviving on a first euro110 billion ($142 billion) batch of rescue loans agreed on condition of deep spending cuts and sweeping public sector reforms.
Later Monday, ministers will also seek to put the finishing touches on their permanent bailout fund ' the euro500 billion European Stability Mechanism ' which is supposed to come into force later this year. They will also discuss a new intergovernmental treaty designed to keep eurozone countries from overspending.
Greg Keller in Paris and Nicolas Paphitis in Athens contributed to this story.