December 14, 2011

Greek Bond Restructure Deal Debated

Banks, EFSF, sovereign creditors may have equal rank under new plan

A plan to restructure Greek sovereign debt could see banks gain equal footing with the European Financial Stability Facility and sovereign creditors, although the measure is still being debated.

Reuters reported that that is the key issue being discussed in meetings around a debt swap. Though no decision was reached on Tuesday, talks are expected to continue in Paris on Thursday or Friday.

Charles Dallara, head of the Institute of International Finance, said in the report, "We've made progress, but there are a number of remaining unresolved issues that will require much further effort by all parties if we're to find common ground."

The plan under discussion could permit private sector creditors to rank "pari passu" with the claims of the EFSF and with sovereign creditors; coupons on the new bonds would be paid to banks and other investors at the same time as loan interest payments. Bankers familiar with the talks said that both sides are still bargaining over the coupon rate and "sweeteners" to close the agreement.

The bond swap, which is known as private sector involvement (PSI+), is a major element of Greece's 130 billion euro ($170 billion) bailout. The country is eager to secure an agreement by the end of January to ensure it receives essential budget relief prior to elections scheduled for Feb. 19.

The co-financing structure considered for the deal is supposed to improve the quality of new Greek bonds to be issued to banks, and bankers have said they found some common ground in the arrangement. One banker involved in the talks who was not identified said in the report, "Banks moved towards the sovereigns' proposal on the condition that the new bonds have about the same credit status as official sector loans."

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