MercoPress. South Atlantic News Agency

Greece and banks begin discussing bonds’ 50% haircut and swap

PM Lucas Papademos is struggling for a parliamentary vote of confidence

Greece and private bondholders begun working on a deal to halve its public debt, a key pillar of a bailout plan to save the country from bankruptcy and ejection from the euro zone, sources said.

While politicians debate in parliament the degree of support they are prepared to give a new coalition government to implement the fresh bailout, Greek and EU negotiators are to launch talks to flesh out the deal with the International Institute of Finance (IIF) which represents banks.

“Negotiations between the IIF, the EU and the IMF will start on Thursday. There may be some preparatory talks on Wednesday. A second meeting will follow,” said a source at a major Greek bank.

“The aim is to have a conclusion soon on the final proposal that will be submitted to the private bondholders. There is no specific deadline for this,” the source said, adding that the main task was to convince foreign banks who hold two-thirds of the bonds.

The new bailout, Greece's second financial rescue in little more than a year and worth a total 130 billion Euros in return for more austerity measures, was agreed by Euro zone leaders at a summit last month.

The deal would halve the country's 200 billion Euros of obligations to private bondholders, recapitalize Greek banks and provide Athens with loans to service interest payments and running costs such as wages and pensions.

The EU has made it condition in releasing the 8 billion Euro loan that all coalition parties sign a commitment to the bailout terms. But the leader of the conservative New Democracy party says he will not to sign, endangering the tranche needed to avoid default by mid-December.

New technocrat prime minister Lucas Papademos said Monday Greece would soon make an official announcement to begin talks on the bond swap. His government is expected to receive a parliamentary vote of confidence.

Greek newspaper Kathimerini reported Tuesday that Greece would propose to bankers that for every 100 Euros Greece owes, bondholders should receive between 10 and 20 Euros in cash, depending on the maturities of the bonds they hold.

Banks, represented by the IIF, are likely to propose that the face value of 141 billion Euros of bonds be cut by 50%, Kathimerini said.

The remaining debt would be exchanged for bonds guaranteed by the Euro zone's EFSF rescue fund and maturing in 22 years, with a fixed coupon of 7% or a floating-rate coupon of between 5.5% and 7.5%, the paper added.

An alternative proposal by the IIF, Kathimerini said, sets out a 37% haircut on 65 billion Euros of bonds, with the remaining debt to be swapped for new, 15-year bonds paying a coupon of 8%.

Under both IIF proposals, the coupon would be linked to Greece's GDP, Kathimerini said.

Greece has been shut out of international markets for long-term financing for almost two years but occasionally taps the T-bill market. On Tuesday it auctioned 1.3 billion Euros of three month Treasury bills, paying 4.63%, broadly unchanged from the last sale on October 18.

On Tuesday the European Union's Statistics office Eurostat seasonally unadjusted flash estimates for third quarter 2011 of Europe’s GDP showed that Greece’s year-on-year GDP contracted by 5.2% compared with a revised 7.4% drop in the second quarter.