Time running out for Greeks

Time is running out for the Greek government to strike a deal with creditors and avoid an increasingly imminent default, analysts say.

A deal between the Greek government and bondholders needs to be agreed upon within the next few weeks in order to be implemented by March, as it takes roughly six weeks for a deal like this to be put into action, Raiffeisenbank macroeconomic analyst Václav Franče said.

"Greece is running out of time. They need to act quickly," he said.

Disagreements over the amount Greece would pay back to bondholders in the future stalled negotiations between Greece and its private-sector creditors during talks Jan. 21.

The two sides had appeared to close in on a deal that would replace existing bonds with new treasuries at a real loss of between 65 percent and 70 percent with an average 4 percent interest rate.

However, the International Monetary Fund (IMF) and Germany were pushing for a lower rate of 3.5 percent, amid concerns Greece's debt would not return to sustainable levels if the average interest on the new bonds reached 4 percent.

Four percent is the minimum banks can accept, Franče said. "Greece will have to accept 4 percent. They don't have negotiating power," he said.

The other main disagreement is that banks and hedge funds would prefer a payment of credit default swaps (CDSs), Franče said.

CDSs, or insurance on assets, are regulated by the International Swaps and Derivatives Association (ISDA), which has the final say on whether insurance taken out on Greek bonds via the CDS market should be paid out. Obtaining funds through CDSs would be the best option for creditors and banks, especially for hedge funds, Franče said.

"Greece doesn't have much negotiating power, and they don't have much time, so this is the most likely outcome," he added.

The EU and IMF are avoiding the payment of CDSs at all costs as the ISDA may not have enough cash, which could lead to potential disaster for financial markets, Franče said.

"Some other financial institutions that hold CDSs could collapse, and ISDA would have to pay out too much."

Outstanding CDSs on Greek debt total $70.8 billion (54.4 billion euros) gross and $3.2 billion net, according to the latest data from the Depository Trust & Clearing Corporation (DTCC). Greek Prime Minister Lucas Papademos told The New York Times Jan. 16 that if no agreement can be reached he would consider legislation forcing creditors to take losses.

Greece's possible default would only affect the Czech market indirectly, Franče said.

"If Greece defaulted, the turbulence that would arise in financial markets could indirectly affect the Czech Republic," he said. "In this case the crown would likely depreciate and exports to the eurozone would possibly decline as there would not be as much demand."

Laura Burgoine can be reached at
lburgoine@praguepost.com