Back to the Drawing Board - NOT a Greek Wedding

Bondholders get close to hammering out a restructuring deal, but unfortunately, negotiations will have to continue.

Yesterday Euro zone finance ministers rejected a debt restructuring offer made by private bondholders and although numbers offered were close to agreement, the rejection and ensuing delay does not bode well for a battered and beleaguered Greece.

In Brussels, ministers met to discuss Athens' debt issues and concluded that they could not accept a coupon of 4% on new longer-dated bonds that were supposed to be issued to private bondholders in exchange for their existing Greek holdings. Banks and other private institutions, represented by the Institute of International Finance (IIF), asked for a 4.0% coupon on the new bonds and therefore a face value of HALF that of the bonds they would replace - Greece felt more comfortable with a coupon closer to 3.5%.

Unfortunately this kind of disagreement, although it may seem minor with a difference of 0.5%, still serves as a major setback as observers will perceive more risk on the issue of finally establishing a voluntary restructuring deal between the Greek government and Greece's creditors. Had such a deal gone through, there would have been some serious reactions in global financial markets. Even worse, time is running out and the clock is still ticking given the fact that failure to reach a deal by March 2012, when Athens must repay 14.5 billion euros of maturing debt, could very well result in default.

The purpose of this sort of restructuring is to reduce Greece's debts from approximately 160% of GDP to 120% of GDP by 2020, a level that both EU and IMF officials could work with when it comes to the failing Greek economy.

Luckily, the rejected deal wasn't the only item on the to-do list and there just may be a sliver of hope for the entire battered Euro zone. Ministers also discussed enforcing stricter budget rules for EU states through the use of a "fiscal compact" as well as steps to finalize the structure of a permanent euro zone bailout fund called the European Stability Mechanism (ESM), which is slated to begin operations this July. This new ESM will be able to lend up to 500 BILLION euros and replace the European Financial Stability Facility (EFSF), which was the temporary fund so far used to bail out both Ireland and Portugal and will still be used to provide part of a second, 130 billion euro package of aid to Greece.

The ever so scrupulous, Germany, also insisted that once the ESM commences, the combined potential outlay of the ESM and EFSF should not pass 500 billion euros. On the other hand, Italian Prime Minister Mario Monti and IMF chief Christine Lagarde have stated the ceiling should be higher, possibly up to 1 trillion euros. Yikes! Either way, though, it is good that budget rules are being looked at with the viewpoint of more responsibility and control; something that should support stability in the entire Euro zone.

Back to the bond negotiations, it should only be a matter of time before an agreement is reached, but we have to keep in mind that as times change, so do prior offers presented in a negotiation - a basic negotiating principle that works strongly against very large deals that seem to require very long periods of time to reach an agreement on. Last October, Euro zone leaders had agreed that the second bailout would total 130 billion euros if private bondholders forgave half of what Greece owes them in nominal terms. Since then, however, the Greek economy has deteriorated even more, which means that either the euro zone governments or the investors, or both, will have to contribute more than previous promises. Reaching a conclusive agreement may appear to be much worse than a fighter jet attempting to refuel midair in a thunderstorm, but as we near March, necessity should drive negotiators on all sides towards an amicable agreement faster - we hope...

Ever so Watchful,

- Chris

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