Brussels/London - Wolfgang Schaeuble was playing Sudoku on
his iPad as he waited to hear whether Greece's negotiating team had persuaded
private creditors to accept a bigger loss on their Greek bonds.
Germany's finance minister needed this last piece of the
debt restructuring puzzle to fall into place. Without the private creditors -
banks, insurers and investment funds - a €130bn deal to save Greece from
default could fall apart. The consequences for the euro area would be
catastrophic.
Schaeuble finally got what he wanted only hours before dawn
on February 21 after negotiations that ran all night. What emerged was the
world's biggest debt restructuring deal, affecting some €206bn of Greek
government bonds, according to law firm Linklaters which acted as adviser.
In interviews with dozens of players involved in the seven
months of talks among banks, national governments, the European Union, European
Central Bank (ECB) and International Monetary Fund (IMF), Reuters has pieced
together how the agreement - Greece's second bailout - came together and how
close it came to failing.
The February 20 discussions had got off to a slow start.
Seated at a large table in a seventh-floor room of the Justus Lipsius building
in Brussels, ministers and advisers from the 17 eurozone nations haggled.
Northern Europeans, in particular Germany and the Netherlands, took a hard line
in demanding increased private sector participation in the rescue.
A deadline for Greece to make a €14.5bn debt repayment on
March 20 loomed. Negotiators had been here before, several times. The mood in
the room on this occasion was one of determination that there must be a
satisfactory conclusion.
"There was never a sense that it was going to implode
or get derailed but things did stall at times," said a senior official
directly involved in the talks. Like others interviewed for this report, he was
willing to speak only on condition of anonymity.
Seven months
The deal came seven months to the day after the first
private sector Initiative agreement with Greece's creditor banks. That was the
first of three attempts to resolve the private creditor part of a debt crisis
that exploded in late 2009 when Greece's incoming government revealed that
public finance numbers had hidden a huge black hole.
The private sector contribution was demanded by German
Chancellor Angela Merkel and her finance minister as the price for securing a
second bailout for Greece by Europe's taxpayers. In that first July 21 deal,
private creditors agreed to a 21% writedown on the value of their bonds. But
the contract was unpicked as Greece's economic plight worsened and the funding
gap grew. In an October 26 agreement, the figure rose to 50%. That too
unravelled.
Now representatives of the private creditors, led by
institute of international finance (IIF) managing director Charles Dallara,
were staring at even bigger losses. Cast by some as the villains of the piece,
they sat along the corridor in a separate room waiting to find out how much
more pain Greece and its main public sector lenders would try to inflict on
them.
With the American Dallara was Jean Lemierre, a special
adviser to French bank BNP Paribas - Greece's largest private sector creditor -
and one of the most experienced debt restructuring negotiators in the business.
For Lemierre, whose experience included leading the
"Paris Club" of creditors which successfully negotiated the
restructuring of Latin American and African debt, these were by far the most
drawn-out and complicated talks of his career. He had been brought in to help
the creditors negotiate after the October deal fell through.
Every time a new agreement came close, there would be more
bad news about the state of the Greek economy and the carefully negotiated
figures would have to be recalculated to fit with the increasingly gloomy
forecasts coming from the IMF, one of the main parties at the table.
Days before their February 20 session, eurozone finance
ministers had cancelled a meeting at the last minute. The intention was to turn
up the heat on the Greek government to force it to agree to more austerity
measures. The ploy worked; now was the moment to get a deal done with the
private creditors.
But negotiation fatigue was setting in and another bleak
report from Greece's international lenders had highlighted another likely gap
in its funding, further muddying the waters. With leadership needed, it was
Dutch Finance Minister Jan Kees de Jager who got the talks moving, the senior
official said.
"He was very focused on how to close the gap between
the €136bn funding requirement and the €130bn we
needed to get it down to," the official said.
One of Greece's sternest critics in public, in private De
Jager was intent on pushing through the deal. His role illustrates the level of
brinkmanship in the months of hard negotiations. Just days before agreement was
finally reached, the Dutchman had publicly threatened to vote against it.
To get the dialogue going, and to put pressure on the
private creditors to forgive more of Greece's debt, a small contact group,
including ECB board member Joerg Asmussen, shuttled between the main room and
the room where Dallara, Lemierre and their advisers were waiting.
The creditors had tried to draw a line in the sand when they
said they would not accept a writedown of more than 50%. But they knew a
disorderly Greek default would inflict tremendous damage on their investments
and their business.
"The talks with the banks were very tough. It went up
and down several times, and time and again we had to send the negotiating team
back to get a better deal," De Jager said.
Debt miles
The months between July 2011 and February had seen numerous
meetings in Brussels, Paris and Athens. Dallara spent much of his time working
at the Grande Bretagne Hotel in Athens. From there he and his team had a front
row view of the worst anti-austerity rioting to have scarred the Greek capital.
Members of the steering committee of the private sector
lenders said they never felt threatened during their stays in Athens. Their
biggest complaint was the long periods of waiting for meetings with the Greek
negotiators.
For despite its prime spot on Syntagma Square and view of
the Parthenon and the Greek parliament building, the hotel was a gilded prison.
The team soon tired of eating every meal there as they waited for Greek Prime
Minister Lucas Papademos to summon them.
One day they took time to visit the Acropolis and Dallara
would occasionally go out shopping, returning with books to help fill the time
between meetings. Greek negotiators called off one such meeting at the last
minute, adding to the tension.
Sources involved in the talks said Lemierre and Dallara
complemented each other well. The figure of IIF chairperson Josef Ackermann was
always in the background, at the end of the phone when Dallara needed him.
Ackermann, who is also chief executive of Deutsche Bank,
stuck to his agenda during a crucial phase of the talks in late January and
attended the World Economic Forum in Davos. Dallara skipped the event, his
badge unclaimed at the parties he had been invited to.
"Ackermann is the invisible man at the negotiating
table," one banking source said of the relationship. Ackermann's line to
German Chancellor Angela Merkel was also important at key moments in the
discussions.
Low point
For the banks and insurers a low point in the negotiations
came in early December, 2011 at a meeting in Brussels.
The private creditors were joined by officials from the EU,
IMF, ECB, the German and French finance ministries and the Greek government.
Representing Athens was Petros Christodoulou, the head of
the Public Debt Management Agency, and two debt restructuring specialists. They
were Cleary Gottlieb's Lee Buchheit and his former colleague Mark Walker, who
had left the law firm for investment bank Lazard in June.
Greece, supported by the IMF and its mission chief to the
country Poul Thomsen, was now proposing a deal that would leave private
creditors swallowing deeper losses than the 50% they had signed up to,
according to one of the participants.
Vega Asset Management, the sole fund representative on the
committee, resigned not long afterwards, citing IMF intransigence over the size
of private sector losses, several sources said. "People were shocked at
how far apart we were in the proposals," said the meeting participant.
As the talks continued in the ensuing weeks, Greece's
three-year-old recession deepened, toughening the IMF's stance on the size of
the hit coming creditors' way. With each passing week, the extent of the losses
needed to ensure Greece cut its debt to gross domestic product (GDP) ratio to
the IMF's 120% target grew.
Some government negotiators were also starting to despair.
The inflection point came with the arrival on November 1
2011 of a new president at the ECB, which throughout the eurozone debt crisis
has resisted calls from the United States and others to act as lender of last
resort.
At a stroke new president Mario Draghi dispelled much of the
pessimism in December by launching a three-year money line to banks, which
pumped nearly half a trillion euros into the financial system. At the last
moment, the ECB also put its shoulder to the wheel to secure a second Greek
bailout, agreeing to forgo profits it had made on its Greek government bond
holdings, returning them to its stakeholders - the eurozone member states - to
pass back to Athens.
That proved crucial in persuading the IMF that the package
added up and would put a 120% debt/GDP target within reach by 2020, as
required. By February, the ECB money meant banks were in a much more optimistic
mood and a deal was once again possible.
For senior eurozone officials, some of whom had been vociferous in their criticism of the banks, the creditors got off lightly. "They got a good deal. They get nearly 50% back. Given the alternative, that's good," the first official said.