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EU close to accepting new writedowns on public sector loans to Greece

IMF head Christine Lagarde calls for further sacrifice from taxpayers as negotiations continue with private sector creditors

European Union officials are preparing to concede that eurozone taxpayers may need to make bigger sacrifices on their loans to Athens or risk a string of sovereign collapses across the continent.

Under pressure from the International Monetary Fund and some EU leaders, Brussels said it may need to go further than the €30bn (£25bn) write-off that was put in place last year as part of a package of measure to save Greece from going bust – a substantial part of which came in the form of writedowns on loans from the European Central Bank (ECB).

The concession came as private sector creditors renewed talks in Athens over the €100bn due to be written off by banks and other lenders.

The head of the International Monetary Fund, Christine Lagarde, urged all parties to make concessions to bring an end to weeks of wrangling that has caused turmoil on international markets. Lagarde said the public sector must consider a bigger write-off following an assessment by the IMF that Greece was in a worse situation than previously thought. Its economy has been hit hard by the severe austerity measures adopted last year.

The Greek government has failed to meet several targets set by Brussels and the IMF, which arranged a €110bn bailout last year. Greece is seeking a second bailout, expected to be worth €130bn, before major loan repayments due in March.

Until this week the major banks with outstanding loans to Greece were under pressure to extend losses from 50% to nearer 70% before Brussels would consider a second bailout.

Creditors are preparing to swap their existing loans to Athens for new ones with lengthened repayment terms. The Greek government and the Institute of International Finance (IIF), which is representing 30 of Greece’s major creditors, were understood to be close to a deal last week, but were unable agree an interest rate for the new packages of loans.

The two lead representatives of the banks, Charles Dallara and Jean Lemierre, met in Paris on Wednesday for talks with member banks and EU officials before flying to Athens on Thursday.

A team of eight lawyers, credit analysts and bankers from the IIF attended meetings during the day ahead of an evening meeting with Greek prime minister Lucas Papademos.

An IIF spokesman denied Dallara had returned to the negotiating table following pressure from EU leaders. Several of the banks represented by the IIF are supported by taxpayers, including Royal Bank of Scotland and Germany’s Commerzbank. “I don’t think anyone has been leaning on anyone in this process. There has been continual telephone conversations between the parties concerned,” he said.

The ECB, which holds tens of billions in Greek debt, is reluctant to write down its holdings without greater sacrifices from private lenders.

Lagarde put pressure on Brussels and the ECB, saying it and other public creditors may need to accept losses if those taken by the private sector are not enough to bring Greece’s debt burden down to a sustainable level.

In response to Lagarde, the EU’s top economic official said more public money would be needed to make up a shortfall in a second bailout after a debt-swap deal is clinched. “We are preparing a package which will pave the way for a sustainable solution for Greece, and in that package, yes, on the basis of the revised debt sustainability analysis, there is likely to be some increased need of official sector funding, but not anything dramatic,” said monetary affairs commissioner Olli Rehn.

Man on a mission

Charles Dallara spent two years in Greece with the US Navy in the early 1970s. Four decades later, he is a regular visitor again, representing the banks that have lent €206bn (£172bn)to an Athens government that is now near bankruptcy.

The 62-year old American, who still sails, swims and plays baseball, was once a managing director of US investment bank JPMorgan. He also held positions in the Bush and Reagan administrations and is a veteran of the sovereign debt crises of the 1980s and 90s. He helped devise the new bonds for Latin American countries that defaulted in the 1980s during his years with the US Treasury, but has acknowledged that he is finding Greece’s debt crisis much harder to crack.

Eurozone finance ministers now want creditors to lower their demands. They announced that position just two days after Dallara, managing director of the Institute of International Finance since 1993, said his best offer was on the table.

Dallara, who is married with three children, has had his commitment to the task questioned since he left the Athens talks on Saturday to go to Paris for longstanding family commitments.

The New York Yankees fan and senior league baseball player has ratcheted up the pressure on the Greek government but, despite his impressive contacts book, it is unclear just how much clout Dallara wields in talks representing such a complex group of more than 450 banks, insurance companies, hedge funds and other investors.

Critics say the very diversity of that group may undermine his position and that there are other more important figures in the background. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds