- Associated Press - Tuesday, January 24, 2012

BRUSSELS (AP) — Europe and private investors were gearing up Tuesday for hard negotiations on how to cut Greece’s massive debt after the region’s finance ministers adopted a tough stance on how much rescue money they would pump into the Greek economy.

On the front line of Europe’s sovereign debt crisis, Athens is trying to get its private creditors — banks and other investment firms — to swap their Greek government bonds for new ones with half their face value, thereby slicing some 100 billion euros ($130 billion) off its debt. The new bonds also would push the repayment deadlines 20 to 30 years into the future.

However, the main stumbling block during the past few weeks to securing this deal has been the interest rate these new bonds would carry. A high interest rate could buffer losses for investors but also would require the eurozone and the International Monetary Fund to put up more than the 130 billion euros ($168.6 billion) in rescue loans they promised in late October.

In the early hours of Tuesday, politicians representing the 17 countries that use the euro as their currency drew a firm line on the Greek debt restructuring.

Jean-Claude Juncker, the Luxembourg prime minister, who chaired a meeting of finance ministers on efforts to fight the crisis, said the average interest rate over the lifetime of the new Greek bonds must be “clearly below 4 percent,” with an average rate of less than 3.5 percent for the period until 2020 — far below the 4 percent demanded by the Institute of International Finance, which has been leading the negotiations for the private bondholders.

The caps on the interest rates underline that the eurozone and the IMF are unwilling to increase new rescue loans above the promised 130 billion euros, even though Greece’s economic situation has deteriorated. After already granting Greece a 110-billion-euro ($142.6 billion) bailout in May 2010, the eurozone and the IMF are threatening to withhold further funding for the country, which repeatedly has failed to hit budget and reform targets required in return for the financial aid.

The interest rate caps will also seriously test the willingness of private bondholders to agree to a debt deal voluntarily. IIF head Charles Dallara over the weekend had characterized the bondholders’ most recent offer as the best possible, adding that lower interest rates would not be acceptable for private bondholders.

But German Finance Minister Wolfgang Schaeuble dismissed Mr. Dallara’s statements as a normal part of difficult negotiations. “We continue the negotiations (with investors) as happily, but also as little susceptible to blackmail as possible,” he told reporters. “That exists in every bazaar — a final offer — one shouldn’t let oneself be overly impressed by that.”

The alternative to a voluntary deal would be to force losses on to investors — a move that the eurozone so far has been unwilling to make. Some officials fear that a forced default could trigger panic on financial markets and hurt bigger countries such as Italy, Spain or even France.

But several ministers indicated that they might be willing to accept a forced default if it puts Athens in a position in which it eventually can repay its remaining debt — including the rescue loans from the eurozone and the IMF. The eurozone has said that Greece’s debt is sustainable if it falls to some 120 percent of gross domestic product by 2020. Without a restructuring, it would reach close to 200 percent by the end of the year.

Even Olli Rehn, the EU’s monetary affairs commissioner, said that forcing some holdouts to accept a restructuring that has the support of the majority of bondholders would be acceptable.

“That is possible within the framework of achieving a voluntary agreement on private-sector involvement,” Mr. Rehn said, referring to so-called collective action clauses that Greece could write into its old bond contracts to allow majority decision-making. The commission so far always has been opposed to any forced losses for investors.

But ministers also put the pressure on Greece to reach a manageable debt level by bolstering its reform and austerity measures.

Greece and the banks have to do more in order to reach a sustainable debt level,” Dutch Finance Minister Jan Kees de Jager told reporters as he arrived for a second day of meetings with his European counterparts. “We have to await the discussions about that because a sustainable debt level is absolutely a precondition for the next (rescue) program.”

Mr. Schaeuble also insisted that firm support for new austerity measures from all major Greek parties — including after elections expected in April — was a precondition for a new bailout.

“Whatever needs to happen, we can only do if its independent from the elections in Greece,” he said.

Greek stocks dropped Tuesday, shedding a collective 3 percent one day after optimism on the debt writedown deal sparked a 5 percent rally.

Meanwhile, updated budget execution figures released by the Greek Finance Ministry showed that despite massive spending cuts, the country’s fiscal deficit for 2011 was actually higher than in 2010.

Last year’s fiscal deficit hit 21.72 billion euros ($28.27 billion) — 270 million euros ($350 million) more than in 2010.

Revenues were 910 million euros ($1.18 billion) below target, but the ministry said this was offset by higher-than-anticipated spending cuts of 896 million euros ($1.16 billion).

These figures are on a cash basis and exclude some categories of spending taken into account in calculating the final budget deficit for 2011, which Greece has pledged to cut to about 20 billion euros ($26 billion).

Nicholas Paphitis in Athens contributed to this article.

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