Lagarde, Merkel Meet to Move Forward Greek Debt Restructuring

International Monetary Fund Managing Director Christine Lagarde will meet with German Chancellor Angela Merkel in Berlin tonight to discuss the restructuring of Greek debt, which must take place before the country’s next tranche of of much-needed aid can be paid out.

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A deal hammered out in October calls for bondholders to accept a 50 percent cut in the face value of their Greek debt, but creditors and authorities have yet to agree on the coupon and maturity of new bonds to determine the total losses investors would suffer. Failure to complete the voluntary swap would not only undermine confidence and deter investors, but also prevent Greece’s troika of lenders form paying Greece its next tranche of aid, according to Merkel.

Merkel meets with Lagarde this evening at 8 p.m. Berlin time, while French President Nicolas Sarkozy, leader of the euro’s second-largest economy, will meet with Lagarde tomorrow in Paris. Both Merkel and Sarkozy said yesterday that the October European summit decisions on Greece must be put in place.

The proposed swap would cut 100 billion euros from the 205 billion euros of privately-owned Greek debt. New bonds would be backed by 30 billion euros of high-quality collateral issued by European Financial Stability Facility.

The writedown on Greek debt is intended to reduce Greece’s borrowing to 120 percent of gross domestic product by 2020. European Union officials have emphasized that Greece’s circumstances are unique, and have denied conjecture that bondholder losses could spread to other rescued nations such as Portugal or Ireland, but further delays in implementing Greece’s debt swap and rescue plan would affect the rest of the euro zone by driving up borrowing costs as investors lose confidence in debt markets.

The decision to have private investors share the cost of debt crisis losses was intended to curb moral hazard in borrowing nations, also making clear to potential lenders that “euro-zone sovereign debt should no longer be considered a safe asset with the implicit promise that it would be repaid in full,” European Central Bank council member Athanasios Orphanides wrote in a January 5 Financial Times column.

“Government debt markets are about trust,” wrote Orphanides. The “collective failure of euro-zone decision-makers” has been the prime cause of rising borrowing costs across the region.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com