Negotiators Near Greek Debt Deal

(MarketWatch) - Talks between Greece and its private creditors will continue next week, with negotiators on Saturday saying they were near agreement on a voluntary debt swap.

Greek Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos on Saturday met in Athens for a third day with representatives of the private sector, Charles Dallara, the head of the Institution of International Finance, and Jean Lemierre of French bank BNP Paribas SA.

"Further progress was made, building on the understandings reached yesterday (Friday) on the key legal and technical issues. We are close to the finalization of a voluntary PSI within the framework expressed publicly earlier this week by Luxembourg Prime Minister Jean-Claude Juncker in his capacity as chairman of the Eurogroup. We expect to conclude next week as discussions on other issues move forward," Dallara and Lemierre said in a joint statement.

Hopes for a plan to reduce Greek's debt load had been buoyed after Olli Rehn, the European Union's economic and monetary affairs commissioner, said a deal could come soon, possibly this weekend. He made the remarks at the World Economic Forum in Davos, Switzerland.

Greece has once again dominated headlines surrounding the eurozone debt crisis as negotiations have dragged on amid fears that even a planned 50 percent writedown of the debt held by banks and private creditors will not be enough to put the country's massive debt pile on a sustainable footing.

Private bond holders agreed last year to accept a 50 percent writedown in the value of their Greek debt holdings through a bond swap. That is expected to knock as much as 100 billion euros ($131.3 billion) off Greece's debt load.

But talks have stalled amid disagreement over the average interest rate bondholders should be paid on the bonds they will receive in return for existing debt. Eurozone finance ministers earlier this week rejected a proposal by bondholders for a four percent coupon rate on the new bonds, pushing instead for a rate nearer 3.5 percent.

Officials have argued that a lower rate is necessary to ensure Greece meets its target of cutting its debt as a percentage of gross domestic product to 120 percent, down from 160 percent, by 2020.

The Financial Times on Friday, citing people familiar with the proposal, reported that Dallara and Lemierre could offer interest rates for new bonds that would translate into bigger losses for bondholders but that could be recouped if Greece returns to strong growth.

Private creditors hold around €206 billion of Greek debt, according to Michala Marcussen, head of global economics at Societe Generale. Assuming a participation rate in the debt swap of 90 percent, a 50 percent writedown would cut Greece's debt by around €90 billion, or 40 percent of GDP.

All else being equal, each half-percentage-point reduction in the coupon that private investors accept would cut Greek debt by a further 2.5 percent of GDP, Marcussen said.

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