Talks between the Greek government and its private sector creditors appeared to be on the verge of breaking down on Friday, as the Institute of International Finance (IIF), which is negotiating on the behalf of bondholders, said that it was taking "a pause for reflection."
Eurozone leaders, Greece and the IIF agreed on a 50% "haircut" on private sector holdings of Greek bonds, in an attempt to bring the country's debt back towards manageable levels. However, since then the country has slipped in its efforts to bring spending back under control, and it is widely accepted that it needs further write-downs.
In a statement published late Friday, the IIF said that Charles Dallara and Jean Lemierre, the co-chairs of the investor group, the Private Creditor-Investor Committee (PCIC), had failed to come to an agreement.
"Unfortunately, despite the efforts of Greece’s leadership, the proposal put forward by the Steering Committee of the PCIC—which involves an unprecedented 50% nominal reduction of Greece’s sovereign bonds in private investors’ hands and up to €100 billion of debt forgiveness— has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt and the October 26/27 Agreement," the statement read.
"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach. We very much hope, however, that Greece, with the support of the euro area, will be in a position to re-engage constructively with the private sector with a view to finalizing a mutually acceptable agreement on a voluntary debt exchange consistent with the October 26/27 Agreement, in the best interest of both Greece and the euro area."
The consequence of the failure of a voluntary agreement could be an involuntary one - a default that could precipitate the exit of Greece from the single currency.
The euro recorded its biggest intraday fall since August 2010 on Friday, as markets traded down on rumours that Standard & Poor's, the rating agency, was preparing to downgrade France, Austria and a number of other eurozone sovereigns.