The lead negotiator on behalf of Greece’s private-sector creditors has urged eurozone leaders to stick to their October 27 pledges in return for a 50% haircut on Greek sovereign debt, warning that investors would reject any fresh calls for bigger losses on their bond holdings.
Charles Dallara, managing director of the Institute of International Finance (IIF), said that private sector creditors were “at the limit” in terms of what they were prepared to offer, and hinted that patience among holders of Greek debt was running out.
“There is no further room for give on the part of private investors, because there is a limit to what one could call voluntary and we are right at that limit now. I'm not sure that everyone in Europe understands that,” he told Emerging Markets in an interview ahead of crucial talks in Athens on Wednesday night with new Greek prime minister Lucas Papademos.
“We agreed to an unprecedented voluntary haircut of 50% of the private financing. If we at any point reach a judgement that it is no longer voluntary, we will not continue. That is not a threat. It is simply a statement of reality. It is my fervent hope that we will be able to reach agreement on a voluntary basis."
Private-sector creditors agreed in principle to write off 50% of their Greek sovereign debt holdings following all-night discussions with eurozone leaders in Brussels on October 27. But details of the deal, including the inclusion of incentives in return for private sector participation in a partial Greek writedown, have yet to be finalised.
Dallara called for the deal’s swift closure, but warned that private-sector creditors would only uphold the bargain if eurozone leaders offered collateral in return, as well as guarantees along the lines of those offered to private sector creditors as part of the so-called Brady Bonds issued following defaults by a number of Latin American nations in the 1980s.
“We took a huge, huge relief for Greece but in return we need the [E30 billion], which is what [German Chancellor Angela] Merkel and [French President Nicolas] Sarkozy offered us that night. We need that to collateralise the new claims, which is in effect a Brady Bond structure. But the details of this remain to be worked out.
He stressed that there were no viable alternatives to the deal and expressed concern at “voices in Europe and even the IMF” who continued to argue in favour of a full Greek default, accompanied by its exit from the eurozone.
“It was one thing for Argentina to walk away from its creditors and be isolated from global capital markets - and they are still isolated - it is another thing for Greece to contemplate this,” he said.
“I'm sure that this is not the direction in which [Greece] wants to go. I'm not so sure, however, that some voices in Europe – even in Germany and the Netherlands, and even in the IMF – may not be tempted by this.
“I'm not sure that everyone believes in good faith negotiations, transparency and even-handed treatment of all creditors and that concerns me.”
While the onus is on European leaders to reach agreement on the details of their October 27 agreement, Dallara stressed that an ultimate solution to the eurozone crisis would also require the participation of large economies from outside the single-currency bloc, specifically Japan, China and the US.
“The Asians and Americans are probably looking for clear European leadership on this issue before they move. On the other hand, if they don't move decisively will Germany and Europe really be able to crystallize their own thinking independently of global support?” he said.
“I would encourage the US particularly and Asia – Japan and China especially – to step up sooner rather than later and not make this a sequential, process. Time is of the essence here, because market forces and market scepticism are strong.”
While expressing cautious optimism that the newly installed administrations in both Greece and Italy would be able to head off sovereign defaults, Dallara nevertheless stressed the importance of bolstering bailout funds at Europe’s disposal to act as a potential firewall against an escalation of the crisis.
“It is still necessary to build a firewall, because even if ... these technocratic governments can begin a process of rebuilding marker credibility, it will take some time and risk will continue to be there for global investors and for ... global markets,” he said.
He added the IMF’s participation in any financial backstop was essential.
“There are so many precedents in the past on how to construct these things and I am perplexed that people seem still to be searching,” he said.
“There are many episodes where globally strong countries came in to create parallel funds to sovereign IMF lending, and it would be easy to formulate a structure where you create a fund alongside the general resources of the IMF which operates additionally alongside the EFSF - so that you have three structures interlinked - ordinary resources of the IMF, EFSF and supplemental funding. This is not rocket science.”