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Eurozone finance ministers on Monday night rebuffed a deal presented by private owners of Greek debt as a “maximum” offer for the losses they are willing to sustain, opening a fresh round of brinkmanship in tortuous negotiations to ease the country’s debt load.

At stake is whether Greece can reduce its debt to a manageable level by cutting €100bn on a voluntary basis, or if it will be forced to resort to a hard default, in which it would unilaterally renege on its obligations.

Charles Dallara, managing director of the Institute of International Finance, which is representing the majority of private bondholders, characterised an offer tabled to Greek authorities on Friday night as “at the limits of a voluntary deal”.

But the proposed terms – thought to include a loss of 65-70 per cent on current Greek bonds’ long-term value – failed to sway eurozone finance ministers meeting in Brussels. Jean-Claude Juncker, the Luxembourg prime minister who heads the group of eurozone finance ministers, said talks “would have to be resumed” to reach a settlement that is “clearly below” the bondholders’ existing offer.

Specifically, Mr Juncker demanded that the average interest rate on new long-term bonds to be swapped for existing Greek debt be below an average 3.5 per cent in the period up to 2020. One person familiar with the discussions said the ministers had not issued a final rejection, and speculated that negotiations would continue at least until a meeting of European heads of government next week.

The gamble to challenge the bondholders raises the risks that the talks could breakdown. The two sides are under pressure to reach an agreement and stave off a Greek default before €14.4bn of its bonds are due on March 20.

Deliberations on the IIF offer have been further complicated by diverging assessments among Greece’s lenders over the its long-term debt levels.

Following the meeting Jan Kees de Jager, the Dutch finance minister, warned: “There’s an emerging consensus that time is running out. Greece must now finally move decisively with structural reforms and generate growth so that its debt becomes sustainable. Without that we cannot provide further loans.”

According to eurozone officials, the International Monetary Fund presented analysis to the Brussels meeting that forecast Greece’s debt levels would be significantly above 120 per cent of gross domestic product in 2020 – the level deemed to be sustainable.

Although the European Central Bank and the European Commission took a less pessimistic view of long-term debt levels than the IMF, all sides concluded that the private bondholders would need to accept a lower interest rate to bring Greek debt levels to manageable level.

This takes account of recent deterioration in the Greek economy and dim prospects for growth. Latest official forecasts show Greece enduring a sixth consecutive year of recession in 2013, before making a slow recovery with annual growth of less than 3 per cent until 2020.

Speaking after the meeting of finance ministers, Mr Juncker said it was “obvious that the Greek programme is off track” and would require further action to be taken in order to conclude the terms of a second bail-out.

The assessment came after a meeting where finance ministers from Germany and the Netherlands expressed their frustrations with their Greek counterpart over a faltering reform programme and repeated failure to meet targets.

A Greek official described the talks in Brussels as “substantive and constructive” and added that negotiations with private holders of €200bn in Greek debt would resume this week, with the aim of making a formal debt swap offer on February 13.

Earlier the German and French finance ministers said Athens must deliver on its deficit reduction and reform plans if a second bail-out for the country was to be agreed in time to avoid a default on a debt repayment due in March.

Conditions for the second bail-out will be harsh, with Greece tasked to make further cuts in wages and pensions and to shut down 100 outdated public sector organisations in the next few months with the loss of 10,000 jobs.

In Paris, François Baroin, French finance minister, and Wolfgang Schäuble, his German counterpart, made clear they expected more efforts by Athens to convince them it would hold up its end of a deal. In a clear understatement, Mr Schäuble said that putting into action decisions taken over the past two years had proved “more difficult” than expected.

Copyright The Financial Times Limited 2017. All rights reserved.
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