Greece is demanding harsh conditions from its creditors as it starts talks with lenders about a proposed bond swap, a key part of Europe's plan to reduce its debt pile and save the euro, people briefed on the talks said.
Charles Dallara's Institute of International Finance (IIF) -- a bank lobby group -- has so far been the lead negotiator, but there are increasing doubts that he has enough support to secure enough take-up for the swap, which will cost banks billions.
The country has now started talking to its creditor banks directly, the sources said.
"There are a number of people in the market who are saying why did (the IIF) take upon themselves this responsibility," one of the people said, asking not to be named.
"In part for that reason, Greece has been talking to creditors individually, just to get their own sense of market sentiment," the person said.
The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.
Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.
There are 206 billion euros of Greek government bonds in private sector hands -- banks, institutional investors and hedge funds -- and a 50 percent reduction would reduce Greece's debt burden by some 100 billion euros.
But key details determining the cost for bondholders, such as the coupon and the discount rate, are still open.
"The battle lines are being drawn," the second person said.
SQUEEZE THEM OUT
It is increasingly likely that Greece will force bondholders who do not voluntarily take part in the bond swap to accept the same terms and conditions, something that is possible because most of the bonds are written under Greek law.
"Ask yourself the question. After launching this, after having told the private sector involvement is essential, are (the governments) going to be prepared to lend money (to Greece) to pay hold-outs?," the first source said.
European Union leaders from the outset had stressed the voluntary nature of the deal, in order to prevent a disorderly default of the country, which they feared could have a calamitous impact on financial markets.
Athens could squeeze out bondholders by changing the law so that any untendered bonds would have the same terms as the new ones, if a majority of debtholders -- for instance 75 percent -- voted in favor of the exchange.
The European Central Bank (ECB) and the French government, who had originally been fiercely opposed to any form of forced squeeze-out, are not so against it now, even if this could trigger a pay-out of Credit Default Swaps (CDS).
One market participant said that the take-up might well be high even if the conditions were unfavorable.
"There aren't many alternatives. If I were an investor, I'd think it was about time to take my loss. I don't see much more money coming in out of Europe, so that's where it stops," this person said, asking not to be named.
"Every time (the plan) fails, something else will need to happen. And it's going to be a harsher step every time."
Only those investors, typically hedge funds, who had hedged themselves by buying CDS might opt out of the bond swap and cash in if that protection was triggered, the first person said. But that number was not particularly large.
Greece is still working hard to garner support, as demonstrated by one well-connected hedge fund manager, who said the fund had recently received a phone call from the Greek government, asking him to put Athens in touch with other funds.
Athens hopes the funds, many of which are based in New York, and are under no political pressure to do a deal, can be persuaded to sign up to the swap, the U.S.-based source, speaking on the condition of anonymity, told Reuters.
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