War of words over Greece heats up

Confidence in Europe's ability to cope with the debt crisis has been dealt a blow as European Finance Ministers pushed bondholders to provide greater debt relief for Greece.

At talks in Brussels, Euro Governments sought to fill a deeper-than-expected hole in Greece's finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the run-up to a January 30 European Union summit. At the same time, efforts to shore up Greece were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted.

While the Finance Ministers of the countries that use the euro as their currency adopted a tough stance on how much rescue money they would pump into the Greek economy, the head of the group that represents the country's private creditors banks and other investment firms warned that the future of Europe was being threatened if there was no agreement on a voluntary debt reduction deal over Greece.

Charles Dallara, the managing director of the Institute of International Finance, warned that Europe is putting decades of progress at risk over the management of Greek debt-reduction talks, which stalled over the weekend.

"European stability is at stake as well," Dallara said in Zurich.

The stalemate came as the International Monetary Fund cut global growth expectations and warned that European financial risked pushing the world back into recession.

"The near-term outlook has noticeably deteriorated," the IMF said in the report.

On the front line of Europe's sovereign debt crisis, Athens is trying to get its private creditors to swap their Greek government bonds for new ones with half their face value, thereby slicing some €100 billion off its debt. The new bonds would also push the repayment deadlines 20 to 30 years into the future.

However, the main stumbling block over the past few weeks to securing this deal has been the interest rate these new bonds would carry. A high interest rate could buffer losses for investors, but would also require the eurozone and the International Monetary Fund to put up more than the €130 billion in rescue loans they promised in October.

Dallara said the private creditors, which include banks, insurance companies and hedge funds, are acting in good faith and that the proposal made last week was in the spirit of October's agreement. At that time, Europe's leaders said Greece should look to reduce the value of its private sector debts by 50 per cent, or €100 billion.

Eurozone politicians drew a firm line on the Greek debt restructuring.

Jean-Claude Juncker, the Luxembourg Prime Minister who chaired a meeting of Finance Ministers on efforts to fight the crisis, said the average interest rate over the lifetime of the new Greek bonds must be "clearly below 4 per cent", with an average rate of less than 3.5 per cent for the period until 2020. That is below the more than 4 per cent average demanded by the Institute of International Finance, which has been leading negotiations for the private bondholders.

The European ministers' tough stance on the interest rates underlines that the eurozone and the IMF are unwilling to increase new rescue loans above the promised €130 billion, even though Greece's economic situation has deteriorated.

After already granting Greece a €110 billion bailout in May 2010, the eurozone and the IMF are threatening to withhold further funding for the country, which has repeatedly failed to hit budget and reform targets required in return for the financial aid.

- Bloomberg, AP

* Talks between Greek officials and bond holders will continue against a backdrop of high-powered summits.
* CEOs and finance heads are gathered for the World Economic Forum in Davos, Switzerland, which runs from today through until Sunday (January 25-29).
* The issue may also come to a head at the European Union summit on January 30.
* Greek officials have said Athens wants to submit a formal swap offer to investors by February 13.
* A deal has to be agreed upon very soon if Greece is to meet a vital bond repayment deadline in March.
* If it can't pay its bonds, Greece would be in default of its debts, a scenario that could lead to renewed panic in financial markets and potentially derail a feeble global economic recovery.

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