Greek Finance Minister Evangelos Venizelos, answers question from journalists after the end of his meeting with Prime Minister Lucas Papademos and Charles Dallara, the head of the Institute of International Finance, which represents Greece's private bondholders, in Athens, on Thursday, Jan. 12, 2012. The Greek government was holding crucial talks with its private investors on Thursday to finally reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package. (AP Photo/Petros Giannakouris)
Greek Finance Minister Evangelos Venizelos, answers question from journalists after the end of his meeting with Prime Minister Lucas Papademos and Charles Dallara, the head of the Institute of International Finance, which represents Greece's private bondholders, in Athens, on Thursday, Jan. 12, 2012. The Greek government was holding crucial talks with its private investors on Thursday to finally reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package. (AP Photo/Petros Giannakouris)
Charles Dallara, the head of the Institute of International Finance, which represents Greece's private bondholders, leaves after his meeting with Prime Minister Lucas Papademos and finance chief Evangelos Venizelos, in Athens, on Thursday, Jan. 12, 2012.The Greek government was holding crucial talks with its private investors on Thursday to finally reach a deal on a bond swap that would reduce the country's debt load and is an integral part of its second bailout package. (AP Photo/Petros Giannakouris)
Tourists walk next to the ruins of the 5th century B.C. Temple of Poseidon as the Saronic Gulf is seen in the background at Cape Sounion, south of Athens, on Wednesday, Jan. 11, 2012. Greece's development minister admitted Wednesday that the debt-crippled country's budget deficit would hit 9.6 percent of GDP in 2011, more than the 9 percent initially projected. (AP Photo/Petros Giannakouris)
ATHENS, Greece (AP) ? Crucial negotiations between the Greek government and its private creditors on a bond swap deal needed to avoid default appeared close to collapse Friday, with representatives of the bondholders saying they had been "paused for reflection."
The deal aims to reduce Greece's debt by euro100 billion ($127.8 billion) by swapping private creditors' bonds with new ones with a lower value, and is a key part of a euro130 billion ($166 billion) international bailout.
Without it, the country could suffer a catastrophic bankruptcy that would send shockwaves through the global economy. The bailout tops a first, euro110 billion program agreed in May 2010, when the country's borrowing costs soared to untenable heights.
Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos met on Thursday and Friday with Charles Dallara and Jean Lemierre of the Institute of International Finance, a global body representing the private bondholders. Finance ministry officials from the eurozone also met in Brussels Thursday night on the issue.
"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward ... which involves an unprecedented 50 percent nominal reduction of Greece's sovereign bonds in private investors' hands and up to euro100 billion of debt forgiveness ? has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt," the IIF said in a statement.
"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," it said. "We very much hope, however, that Greece, with the support of the Euro Area, will be in a position to re-engage constructively with the private sector with a view to finalizing a mutually acceptable agreement."
Discussions in Athens on Friday and during the finance ministry officials' meeting in Brussels on Thursday had been "very, very tense," one person close to the talks said.
The finance ministry officials clashed over the interest rates that the new bonds should carry, other people familiar with the talks said. Some governments had demanded an interest rate of as low as 3 percent, a very low rate for bonds that are paid off in 20 to 30 years' time, according to another source. All spoke on condition of anonymity because of the sensitive nature of the talks.
The interest rate is key to determining the cost of the second bailout for Greece's official creditors ? the eurozone and the IMF.
Just after Friday's meetings ended, a senior Greek government official ? who likewise spoke on condition of anonymity because of the confidential nature of the negotiations ? said the talks would likely resume next week, possibly on Wednesday. IIF spokesman Frank Vogl said that would depend on developments over the coming days.
Greece is rushing to reach a deal on the bond swap that would reduce its privately-held debt by roughly half, ahead of a major euro14.5 billion bond redemption in late March. Without the deal, and funding from the country's second bailout, the country faces a messy default.
The talks are being complicated by the large number of actors involved in the broader bailout deal. Not only the Greeks and the IIF, but the 17 euro countries and the International Monetary Fund also have to sign off.
One key aspect of the bond deal is what percentage of private bondholders are willing to sign up to it. Without voluntary participation by the creditors, the agreement could be considered a "credit event", which would trigger the payout of credit default swaps ? essentially insurance against a default.
The eurozone fears that a CDS payout could causer further turbulence on financial markets and hurt banks that have sold them.
One option would be for Greece to include so-called "collective action clauses," which could force reluctant private creditors to sign up to the deal if a majority of bondholders are willing to participate.
Government spokesman Pantelis Kapsis said the country has not yet decided whether to submit such a bill to Parliament, a move that would pave the way for the collective action clauses to be included.
"There is no decision as to if and when" such a bill could be submitted, Kapsis told the Associated Press.
Another issue is whether the deal will fall under English or Greek jurisdiction ? something that Kapsis said was still being negotiated.
"It is not a given that we will go under English law," he said in an interview on Athens 9.84 radio.
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Steinhauser reported from Brussels. Nicholas Paphitis in Athens contributed.
Associated PressSource: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2012-01-13-EU-Greece-Financial-Crisis/id-24964c5672d044148e5ab4eb3b2120a1
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