Big banks and investment firms have been asked to forgive Greece some 50 per cent of its debts so that the country can concentrate on getting its economy back in shape and eventually raise money on financial markets again.
Athens has been kept afloat by a €110 billion ($144 billion) bailout from the eurozone and the International Monetary Fund since May 2010 and has been promised an extra €130 billion in aid if investors agree to share part of the burden. The idea is that by forgiving Greece part of its debt, private creditors avoid the much bigger losses they would face in a tumultuous default.
While the eurozone and bank representatives reached a tentative deal on a debt restructuring in late October — which would see Greece debt cut by some €100 billion — discussions on the details of the agreement have dragged on.
The plan was to agree on the terms of a bond swap by the end of the year, so that private investors could exchange their old bonds for ones with a lower value in January or February, ahead of a €14.4 billion repayment deadline Athens faces in March.
In recent days, the Greek government and private investors agreed on some structural aspects of the package, but are still divided on central financial questions, which will determine the level of losses private creditors have to accept, said the person, who has been briefed in the talks.
The person was speaking on condition of anonymity because talks are still ongoing.
Investors won concessions from the government negotiators, who agreed to provide legal certainty that private creditors won't face more losses if Athens runs into trouble again in the future.
For instance, the swapped bonds will be treated in the same way as loans from the eurozone in case of a future default by Greece.
On top of that, the new bonds will be issued under U.K. rather than Greek law, giving investors extra security that the parliament in Athens won't be able to change their terms in the years to come.
But the person said that there was still no deal on when Greece will have to repay the new bonds and at what interest rate. A high interest rate could add billions of euros to Greece's financial burden.
Greek Finance Minister Evangelos Venizelos said Tuesday that he expected to reach an agreement with the private sector by early January, but the person close to the negotiations declined to commit to a deadline. He said informal discussions would continue in the coming days.
All participants in the negotiations — Greece, the IMF and the eurozone on the one side and the bank representatives on the other — are under enormous pressure to reach a deal that can convince enough bondholders to participate.
The IMF said in a report earlier this month that "near-universal participation" in the bond swap was necessary for Greece's debt to become sustainable again.
How difficult that may be became clear earlier this month, when hedge fund Vega Asset Management resigned from the committee that has been leading the negotiations for the private investors. In a letter dated Dec. 7, Vega threatened legal action against Greece if it was forced to take steep losses as part of the restructuring.
The person close to the talks said that letter was friendly in tone, and that some holdouts were to be expected, since different bond holders have different interests at stake.
For example, a hedge fund, which may have bought its bonds when they were already trading at a steep discount, may be more willing to bet on getting bigger payments through a law suit than a bank or insurance fund more focused on cutting its risks.
Separately, Greece's Finance Ministry said it exceeded its deficit-cutting targets in the first eleven months of the year, despite a revenue shortfall. A ministry statement on state budget execution Thursday showed the deficit was €20.6 billion ($26.7 billion), a little bit lower than the €21.1 billion target. The figures exclude certain categories of spending.
Nicholas Paphitis in Athens contributed.