By COSTAS PARISLONDON—The Greek government is expected to ask private investors holding the country's debt to accept a haircut of 60%, with a previously agreed 50% write-down no longer seen as sufficient in light of the country's deteriorating economy, people with direct knowledge of the matter said Monday.
"The cut in terms of net present value [a calculation used by investors to measure future returns] will likely edge higher towards 60%. We still expect an agreement in January. There are reactions from bond holders but we basically have little choice," a banker involved in the talks said.
Officials say that Greece's lingering recession, which now has entered its fifth year, has thwarted government efforts to increase the tax receipts needed to shrink budget deficits.
Getting Greece's creditor banks to agree to writing down their debt holdings is an integral part of a €130 billion ($165.35 billion) second bailout package for Greece. The plan will call for an exchange of old bonds with new ones that will have a maturity of up to 30 years and carry a coupon of between 4% and 5%.
If an agreement is reached, as much as €206 billion in debt held by private investors will be cut to around €100 billion. If Greece doesn't get the bailout loan it will become the first euro-zone country to default as early as March.
Olivier Blanchard, the International Monetary Fund's chief economist, said last week that Greece's haircut could have to be larger.
"The numbers are not good" for Greece, Mr. Blanchard said in an interview on CNBC television, adding that there will "have to be substantial haircuts."
A full participation in the bailout by private creditors would allow Greece to reduce its total government debt to about 120% of gross domestic product in 2020, down from more than 160% currently.
Greece has sought a greater than 90% participation among creditor banks for the program to be viable. Athens is seriously considering using so-called collective action clauses that would stop holdouts from blocking the deal if the participation rate reaches 75%, officials say.
Greek Prime Minister Lucas Papademos said last week that Greece faces the risk of a disorderly default in March if it doesn't complete negotiations for the country's second bailout. Greece faces a daunting €14 billion in debt redemptions coming due that month.
Beyond the bigger cut in Greece, private bond holders of euro-zone sovereign debt are concerned that the remedy will be repeated in other countries like Italy, Spain and Portugal, fuelling contagion across international markets despite the fact that both the euro zone and the IMF have described Greece as a "special case."
A senior Greek government official said the higher cut may be inevitable as the economy has further deteriorated since the 50% write-down agreement was agreed in October.
The budget deficit target for 2011 will be missed due to lower-than-expected tax revenue, said one Greek official. "We now expect a budget deficit of between 9.5% and 10% and it's not impossible that we even go beyond 10%. We are now working on the full-year data," he said.
In the first 11 months of last year net income to state coffers amounted to €43.8 billion, missing the target by €1.8 billion.
The Greek official said he expects Greece's so-called troika of creditors—the European Union, the IMF and the European Central Bank—to push for deeper spending cuts—especially in private sector salaries—when they return to Athens Jan. 16.