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NEW YORK From the outside, it can be hard to know just who has the upper hand in the negotiations between Greece, the international community and holders of the Mediterranean country's bonds.
One day it appears Greece is close to reaching a voluntary restructuring of its sovereign debt. And the next, talks aimed at getting Greece's creditors to accept steep losses on those bonds are at a standstill.
The talks have taken on the tenor of a labor negotiation, with leaks to the news media aimed at strengthening one side's bargaining position. But sovereign debt restructuring experts say none of this is surprising.
Harvard economist Kenneth Rogoff told Reuters this kind of wrangling and squabbling is not uncommon in negotiations aimed at trying to craft a so-called orderly default on a sovereign debt.
He said it is important to strike the right deal in the Greek talks because similar negotiations may be necessary down the road to deal with Italy and Spain's sovereign debt.
The following are some questions and answers, based on interviews with people familiar with the talks, which are designed to help make sense of the conflicting headlines:
Q: What is being discussed?
A: The talks are aimed at agreeing on a plan to reduce Greece's outstanding debt from 350 billion euros to about 250 billion euros in a negotiated swap of bonds. At a minimum, bondholders are looking at a 50 percent reduction in the face value of Greek bonds and potentially a much bigger loss.
One of the issues now holding up talks is just what the interest rate will be on the new set of bonds Greece will issue to replace its outstanding ones. Greece has said it doesn't want to pay a coupon of more than 3.5 percent on the new bonds, while private creditors are demanding an interest rate of at least 4 percent.
Q: Who is at the negotiating table and what is at stake for each group?
A: There are three main groups involved in the talks: private creditors such as banks and hedge funds that hold Greek bonds, public and quasi-public institutions such as the International Monetary Fund that have pledged aid to Greece, and the Greek government.
The public institutions aren't participating directly in the debt swap, but they have the power to reject any agreement Greece reaches with its private creditors on the grounds that it doesn't go far enough to reduce Greece's debt burden. Without approval from the public institutions, Greece can't get the aid money it needs to get its finances back on track after the swap.
Q: So, are all the private creditors acting together? Do they all want the same thing?
A: No. Some holders of Greek debt are large European banks who bought Greek bonds when they were worth more than they're trading for now. If the banks hedged their Greek debt holdings with credit default swaps (a derivative-like insurance product), they may stand to benefit from a Greek default by collecting on those swaps.
But the banks don't want to cause too much disruption out of fear it will destabilize the rest of the euro zone.
Other bondholders are hedge funds that bought Greek debt more recently than the banks did and at even cheaper prices. Some want Greece to default so they can collect on those credit default swap contracts because those derivatives will pay out more than the funds stand to make in the talks.
Other hedge funds have tried to buy up all the Greek debt that is governed by UK law instead of Greek law. They believe they stand a greater chance of getting a legal victory by suing in a British court than in a Greek one.
Q: Are the hedge funds the villains in this?
A: The hedge funds have attracted a great deal of attention over the past two weeks. In the media, the hedge funds are often portrayed as the group preventing a deal from being completed and only care about making money off Greece's misery.
"They have the best legal advice and they are not going to cave," said a Eric Sprott, who runs the fund Sprott Asset Management. "I think they have the upper hand in the discussions."
But hedge funds may not be the real sticks in the mud that some make them out to be. One member of the negotiating committee estimates that hedge funds own between 5 percent and 10 percent of all Greek debt.
There's a chance the European banks are holding out too. Some are arguing that if banks have to take a large haircut on Greek debt, it might discourage those institutions from buying new debt issued by other troubled euro zone countries.
"Banks routinely demand ransom from rich country citizens and the IMF in return for partial debt write downs for highly indebted developing countries," Rogoff wrote in an email to Reuters.
Meanwhile, the public institutions have their own card to play, which is getting the best deal for the benefit of future negotiations.
"The problem for the ECB and the IMF is that if they do not bargain hard in Greece, they will have a very weak hand if and when other countries such as Portugal, Ireland and Spain enter restructuring negotiations," Rogoff said.
Q: What if the talks fail?
A: Nobody knows exactly, and the uncertainty in itself is perilous to the negotiations. If Greece defaults, the worst case scenario is that it would lead to defaults in other euro zone nations and spark a Lehman-like financial crisis.
However, some people close to the negotiations think a default on Greek debt might not be such a big deal. It's questionable whether Greece would have to leave the euro and return to the drachma in the event of a default.
One widely held view is that any attempt by hedge funds to recover assets in Greek courts after a default would be very difficult.
Q: Why all these leaks to the press?
A: Just like in bankruptcy negotiations, leaking things to the press can bolster a bargainer's position. For instance, if European officials fear hedge funds are about to spoil the entire deal, they might be more willing to concede some small points to make the overall swap more palatable. That would be good, of course, for the hedge funds but it would also be good for the banks.
The Greek talks aren't a done deal yet, but most participants still think it's possible for a deal to get done.
(Additional reporting by Svea Herbst Bayliss in Boca Raton and Katya Wachtel and Dan Bases in New York; Editing by Matthew Goldstein and Chizu Nomiyama)