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 – 130 billion euro 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. What emerged was the world's biggest debt restructuring deal, affecting some 206 billion euros 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 and International Monetary Fund, 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 euro zone 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 14.5 billion euro 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 to the Day
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 percent write-down 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 percent. That too unraveled.
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 Dallara, a 62-year-old American, 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 International Monetary Fund, one of the main parties at the table.
Days before their February 20 session, euro zone 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 136 billion (euro) funding requirement and the 130 (billion euros) we needed to get it down to," the official said.
One of Greece's sternest critics in public, De Jager was, in private, 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 European Central Bank 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 percent. 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.
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. Greek negotiators called off one 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 Chairman 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.
The 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, European Central Bank, 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 percent 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 GDP ratio to the IMF's 120 percent 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 European Central Bank, which throughout the euro zone 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 forego profits it had made on its Greek government bond holdings, returning them to its stakeholders - the euro zone member states - to pass back to Athens.
That proved crucial in persuading the IMF that the package added up and would put a 120 percent 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 euro zone 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 percent back. Given the alternative, that's good," the first official said.
(Reporting by Sophie Sassard, Tommy Wilkes, Luke Baker, Daniel Flynn, Steve Slater, Marc Jones, Ed Taylor, Philipp Halstrick, Dina Kyriakidou, Annika Breidthardt. Writing by Alexander Smith)