For weeks we have been hearing “agreement soon” on Greek bond haircuts. The theme for the day today as it was yesterday and as it was a week ago is “tomorrow”.

One problem with all of these “deal is close” announcements is none of them have included an agreement from those who stand to benefit if there is a credit event. Until those CDS holders are made whole, or at least the CDS holders are satisfied, there is no deal, just noise.

The Wall Street Journal reports UPDATE: Greek Debt Talks Appear To Stall Saturday

Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks’ top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.

Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.

“Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we’ll see. It (negotiations) has again become complicated with the new demands over the coupon,” said a person with direct knowledge of the talks.

Earlier, people familiar with the matter said that the IMF and Germany don’t believe Greece’s debt would return to sustainable levels if the average coupon on the new bonds is around 4%, pushing for a lower coupon.

“We were discussing technical and legal issues having agreed in principle to an average coupon of 4%, but the IMF insists this won’t be enough to bring (Greece’s) debt back to sustainable levels,” said another person with knowledge of the talks. This is the second intervention by Germany and the IMF in debt talks in the last eight days over the coupon rate.

IMF Germany Think 4% Coupon Too High

It’s hard to say whether it’s the CDS holders who are the only holdouts here. Rather it’s possible, there is no general agreement at all. Interestingly, both German and the IMF think Greece cannot recover with a 4% or higher coupon rate. Germany had been arguing for a 2% rate.

At a 2% coupon on new debt, assuming a 10% Greek haircut rate, existing bondholders (except the ECB) would suffer 76% losses plus whatever losses it would take to make the ECB whole on the garbage it is holding on its balance sheet.

Reuters has an interesting “Greek Haircut Calculator” to see what losses might be at varying rates on new debt.

Mike “Mish” Shedlock
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