Q&A: Greece debt write-off talks

Charles Dallara, head of the Institute of International Finance
Image caption Charles Dallara, representing Greece's private creditors, holds a key role in the negotiations

Greece is in talks with its private creditors that are vitally important, not just for the country itself, but for wider efforts to tackle the eurozone debt crisis.

Why are the talks taking place?

Put simply, Greece cannot afford to repay its debts, and certainly not in the time scale it had previously agreed.

Something needs to give, and one way to reduce its massive pile of debt is to ask those people to whom it owes money to write off some of that debt.

The Greek government, like all governments, issues bonds to raise money. These bonds, which are effectively IOUs, are bought by private investors. They are lending money to the government in return for interest and a promise to repay the initial loan at a set date.

Athens is now asking that these investors, which include banks, fund managers and private investors around the world, if they would agree to write off half of the money it owes them.

European leaders agreed in principle to a voluntary, 50% write-off last year, but now the people who actually loaned Greece the money - the private creditors - need to agree.

Why the urgency?

Governments issue bonds regularly, and they mature over various time scales, typically six months to 10 years, so repayment dates come thick and fast.

A key repayment date for Greece comes in March, when it needs to pay back 14.4bn euros ($18.4bn; £12bn) to lenders.

As things stand, it does not have the money to repay these debts. To meet its obligations, therefore, Greece needs help.

The European Commission, International Monetary Fund (IMF) and European Central Bank (ECB) have already provided tens of billions in bailout funds to Greece, and are ready to provide more.

However, they are insisting on certain conditions, such as strong action to cut spending to reduce the government's budget deficit. Another key condition is that Athens agrees with private creditors a deal to write off some of its debts.

If it doesn't get the bailout funds, it cannot repay its debts.

Who are the parties involved?

There are only two - the Greek government, naturally, and a body called the Institute of International Finance (IIF), which represents the private creditors.

Created in 1983, its members include most of the world's largest commercial banks and investment banks, as well as a growing number of insurance companies and fund management firms. It has 450 members, about half of which are based in Europe.

What are they discussing?

There are two main issues to be discussed. First, not surprisingly, is the size of the write-off. It is in Greece's interests to pay back as little as possible, and in the lenders' interests to get as much money back as they can.

However, following the agreement by European leaders last year for a 50% write-off, there is a general acceptance on this figure.

This means much of the negotiating is centred on the rate of interest that Greece will repay on its existing debts. As part of any overall agreement, Greece's existing debts will be renegotiated and rolled over into new bonds. Again, of course, Athens wants the interest rate on these bonds to be as low as possible, while the creditors want a higher rate.

This has been the main sticking point, and is why the talks between the two parties were suspended earlier this month.

There are also reports that a small number of hedge funds are blocking an agreement, either to force a better deal for the creditors, or to scupper the negotiations entirely. If the talks break down, Greece may default on its debts, a scenario which the hedge funds have insured against.

What are the possible outcomes?

There are three main possible outcomes.

First, the two parties reach agreement and private creditors take the hit. This means that Greece's debts are reduced significantly in one fell swoop, and that it is more likely to get the next tranche of bailout funds from the European Commission, IMF and ECB, which means it will be able to pay its debts due in March and avoid a default.

Second, no agreement is reached and Greece unilaterally decides what to pay back to its creditors. Its bonds are issued under Greek law, so the government can change the law and effectively force creditors to accept significant losses. This is likely to be deemed a technical default in the eyes of financial markets.

Third, there is no agreement and Greece defaults on its debts, meaning creditors lose all their money.

This is seen as the worst case scenario. Not only might Greece be forced to give up the euro but, analysts say, the repercussions of Athens simply not paying its debts would be grave and far-reaching.

Confidence in the entire eurozone would be severely undermined, not least the attitude of investors to buying bonds of other highly indebted nations, such as Italy. If investors stop buying bonds issued by other governments, then those governments in turn will not be able to repay their creditors - a potentially disastrous vicious circle.

Equally, if banks that are already struggling to find enough capital are forced to write off huge sums, they will become weaker still, undermining confidence in the entire banking system. Banks would then be even more reluctant to lend to one another, potentially sparking a second credit crunch, where bank lending effectively dries up.

However, most analysts believe a deal between Athens and the IIF will be reached. The consequences of failure outlined above, they say, are simply too great.

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