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By Edward Taylor and Philipp Halstrick
January 11, 2012 2:35 PM EST
Talks about private sector creditors paying for part of a second Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro zone governments will have to increase their contribution to the aid package.
"Governments are mulling an increase of their share of the burden," said one of the bankers, who is familiar with the talks.
Banks and investment funds have been negotiating with Athens for months on a bond swap scheme to cut Greece's debt burden from 160 percent of the nation's annual output to a more manageable 120 percent by 2020. This is central to a second, 130 billion euro (107.7 billion pound) bailout that international lenders have drawn up to help the country avert default.
As part of these talks, banks have agreed a "voluntary" 50 percent write-down on Greek debt holdings but have faced demands to make further concessions, a factor that has made it less attractive for some of the investors to take part on a voluntary basis.
The participation rate among private sector investors is currently less than 75 percent, which means Greece's debt will be reduced by far less than expected, the source said.
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Asked whether governments will have to put up more cash to make up for such a shortfall, another senior banker said: "Nothing is decided yet, but the bigger the imposed haircut, the less appetite there is for voluntary conversion."
A third senior banker, who was asked the same question, said: "Private sector involvement is going badly."
There are suggestions in euro zone government circles that ministers are realising they may need to bolster the planned second bailout if the voluntary bond swap scheme falls short of expectations.
Stumping up yet more money would be politically difficult in Germany and other countries in the northern part of the currency bloc.
An Athens-based source close to the talks on private sector involvement (PSI) insisted: "The government is pushing hard and is close to signing a deal." But the source declined to give an indication about take-up.
MERKEL, SARKOZY INSIST
On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy insisted private-sector bondholders must share in reducing Greece's debt burden and said no further aid would flow to Athens without a deal.
Banks and other private sector creditors attempted to agree a deal before Christmas to cut the value of their bonds by half in return for a mix of cash and new bonds.
But the talks hit trouble over the details of the debt swap such as the coupon, maturity and the credit guarantees. These will determine the bonds' Net Present Value (NPV), and thereby the actual hit the banks need to take.
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