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The Public Debt Management Agency has prepared and announced the bids within the 50% debt reduction programme for local and foreign holders of Greek government bonds. Negotiations with private holders have started today and the ultimate goal is relieving Greece of obligations worth € 100 billion by the middle of next year. It is crucial that the programme involves the highest number of creditors and to reduce the total debt they hold by around € 103 billion from today’s € 206 billion.

Government bonds, worth € 200 billion, will be rolled over voluntarily with new bonds worth € 70 billion and another € 30 billion in cash. The cash will be covered by the second bailout agreement that the new government of Lucas Papademos should ratify as soon as possible to enable Greece to receive € 130 billion in instalments by 2014. The average level of interest rates on new bonds will be 6%. It will depend on the duration of their maturity and will vary between 5.5% to 8%.

The Greek proposal is to replace bonds maturing in 2020 with 85% of the new government bonds with reduced face value and 15% in cash. Bonds maturing by 2014 will be replaced with 80% of the new securities with reduced face value and the remaining amount will be paid in cash. Long-term bonds to be repaid after 20-30 years will be offset by about 30%-40% cash and the remaining amount will be invested back in government bonds with reduced face value.

The proposal of the Institute of International Finance (IIF) has two main directions that relate to local and foreign creditors. For foreign holders of Greek government bonds worth around € 140 billion, the union proposes to replace half of the new bonds with new bonds with reduced face value with 22 years of maturity. The European Financial Stability Facility (EFSF) should guarantee them to € 29.74 billion. The interest rate will vary from 5.5% to 7.5% and the difference between the current nominal GDP growth rate and what is expected in the period to the end of maturity will influence them.

For holders of Greek government bonds such as banks, pension funds and other financial organizations, which together hold about € 65 billion in Greek debt, the International Union of Banks provides for a 37% haircut. It is suggested that the remaining 63% be replaced with the new bonds with reduced face value, which will have 15-year maturity and interest rate of 8%.
 
On Tuesday evening, the head of the Institute of International Finance (IIF), Charles Dallara, will meet Prime Minister of Greece, Lucas Papademos, to clarify the details about the transaction for the haircut on Greek debt held by private creditors. Meanwhile, it has become clear that reducing the nominal value of Greek government bonds would affect several public companies on the Athens Stock Exchange. Two of them are expected to have particular difficulties with capital after the deal comes into effect.

The draft budget for 2012 is expected to be submitted for first reading in parliament on Friday, while the Ministry of Finance will review once again the purpose of reducing the budget deficit for 2011. Currently, the difference between the planned and achieved figures in the economic recovery programme in Greece is around two billion euros, and it will be reduced to over one billion euros after reviewing the deficit levels. The supervisory Troika is expected to arrive at the end of this week and to determine precisely what should be done by December in order to secure the payment of the sixth instalment of the bailout worth eight billion euros. If everything goes according to plan, the decision for the bailout payment will be taken before the end of November this year, said the chairman of the council of finance ministers from the eurozone, Jean-Claude Juncker.