Greece's Investors Facing a Deeper 'Haircut'

Greece's ongoing bailout talks have made a significant move forward, but would require private investors to take an even bigger bath on Greek bonds.

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A potential breakthrough might have emerged from two days of talks in Athens between the heads of Greece and the Institute of International Finance, the lobby burdened with representing the interests of disgruntled European bankers and their private sector investors. A report from The New York Times says bondholders are close to conceding a major negotiation point with regards to the interest rates affixed to a new round Greek bonds, with investors agreeing to let that number dip as low as 3.6 percent. This would accrue on top of the 50 percent nominal loss already applied to the bonds, a painful reduction referred to by economists as a "haircut."

The deal has plenty of potential roadblocks. The International Monetary Fun and European leaders have repeatedly lobbied for larger debt reduction from a country whose economy has been given a grim prognosis. And hedge fund investors who have been loading up on deeply slashed, old Greek bonds may refuse to participate, the Times reports. They could pursue legal action if Greece attempts to render their bonds worthless by adding retroactive "collective-action clauses" into their terms. And then there is the matter of the European Central Bank, owner of 55 billiion euros' worth of Greek bonds. With the new losses bringing the total amount of reduced value on their investment to over 70 percent, it's not surprising that the Bank has remained stubbornly undecided in how to proceed. That's one heck of an expensive haircut.

Adding to their woes, the Greek government denounced on Saturday a proposed plan from Germany that would impose more stringent monitoring of their domestic budget from the European Union. Revealed yesterday in The Financial Times, the plan called for direct intervention from the rest of Europe into Greece's ongoing financial dealings, a gesture that has stung national Greek pride and stoked fears of a coming loss of national sovereignty.

[Pictured: Poul Thomsen, the International Monetary Fund mission chief in Greece, right, European Commission official Matthias Mors, center, and Klaus Masuch of the European Central Bank leave Maximou mansion after a meeting with Greek Prime Minster Lucas Papademos in Athens, Friday, Jan. 20, 2012.]

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