ATHENS Greece began a new round of bargaining on a bond swap deal with its creditors on Wednesday, with both sides under mounting pressure to iron out differences before they push Athens to a messy default.
The two sides said little after the more than two-hour meeting other than to note they would meet again on Thursday. Greece needs a deal within days to avoid the prospect of default when bond redemptions come due in March.
"They are working hard to breach differences and they will continue tomorrow," a source close to the talks told Reuters.
Officials and bankers earlier expressed hope that a deal could be struck in the coming days despite a breakdown in talks last week over the interest rate Greece will offer on new bonds and a plan to enforce investor losses.
Both points were on the table when negotiations resumed between Charles Dallara, head of the International Institute of Finance representing private creditors, and Greece's prime minister and finance minister.
With 14.5 billion euros ($18.5 billion) of bond redemptions due in late March, Athens goes into the talks with a weak hand.
It will take weeks to process the paperwork after a deal is reached and Greece's foreign lenders have warned and that the work must be cleared before Athens receives more international funds.
"In the end, something is likely to be agreed partly because no side is going to want to see a disorderly default," said Ben May, European economist at London-based Capital Economics.
"A lot of what's been going on is maneuvering from both sides to get a better deal. There's likely to be an element of brinkmanship taking place from both sides in order to get the best terms."
Investors fear a disorderly default could jolt the financial system and tip the global economy into recession.
With analysts warning the costs of failure are too high for either side to leave without agreement, earlier worries of a prolonged stalemate have given way to hopes of a deal by the end of the week or early next week.
Greece has ratcheted up the pressure on hedge funds and other holders of Greek debt ahead of the talks by threatening to
consider legislation that forces creditors to take losses if not enough bondholders sign up to the deal.
A law on so-called collective action clauses forcing holdouts to accept losses could be drafted if Greece deems the participation rate unsatisfactory, Greek officials said.
A debt swap is necessary to clinch a new rescue package for Greece but it will push Athens into temporary default irrespective of the size of investor losses, a senior analyst at Fitch Ratings told Reuters on Wednesday. He said the terms of the agreement would influence the rating of the new bonds.
"We would mark it appropriately with a default rating, which we would probably maintain for a short period before we put the replacement bonds on a new rating that we have not decided on yet," Fitch's lead analyst for Greece, Paul Rawkins, said.
Hedge funds holding Greek bonds that mature in March may have the strongest hand.
The Greek government wants to swap out that maturing debt for new, lower-yielding bonds and a small cash payment as part of a program in which bondholders would voluntarily write down 100 billion euros from Greece's debt of over 350 billion euros.
But some hedge funds that snapped up chunks of Greece's next big maturing bond, the March 20 2012 issue, for around 40 cents on the euro, are balking.
A team of European Union, International Monetary Fund and European Central Bank officials are already combing through Greece's books as part of efforts to finalize the new, 130 billion euro rescue package the country needs to stay afloat.
The bailout, together with structural reforms, aim to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.
The debt swap deal would see creditors voluntarily giving up 50 percent of the nominal value of the bonds they hold.
The real loss, known as net present value, is estimated at between 60 and 70 percent depending on the coupon, maturity and discount rate. The hit on individual banks would also depend on the price at which they bought Greek bonds.
The main stumbling block in the negotiations has been the low coupon, or interest payment, offered on the new bonds.
The talks come against a backdrop of rising anger among ordinary Greeks, who have been hit hard by the tax increases and spending cuts which were part of a first bailout agreed in 2010.
They now fear more austerity and wage cuts with the second bailout and thousands marched to parliament on Tuesday in an anti-austerity protest, waving banners reading "EU, IMF out!."
Greece has entered its fifth consecutive year of austerity-fuelled recession, with unemployment at record highs and nearly one in two youth out of work. ($1 = 0.7851 euros)