UPDATE: Greek Debt Talks Appear To Stall Saturday .

wsj.com ^ | 1/21/12 | Costas Paris and Stelios Bouras

[L,TOWM]

ATHENS (Dow Jones)--Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future.

Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released.

Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors.

"Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks

[L,TOWM]

There was specualtion on Bloomberg yesterday that some of the hedge funds holding credit default swaps on the private label debt may be blocking a deal. If there is any truth to that, it would be an astonishing example of myopia by people that should know better.

[Oldeconomybuyer]

The Greeks could just do what Obama did to GM — tell the bondholders to pound sand and give what’s left to the unions. It’s the Marxist way!

[The Old Commander]

Why? If the CDS are valid, they will compensate the bond holder %100. Not agreeing to a haircut is the obvious choice for the holders of CDS if they could be certain that the issuers of the CDS have sufficient capital to make the payments. That is the question that is preventing an agreement.

[L,TOWM]

And the other side of the CDS? The writers of the swap and those that are on the hook for repayment? And the effect that the default would have on the on the public holders of Greek debt?

We saw what happened to the financial system when a lot swaps were invoked in 2008. So, who gets to be AIG, Bear Stearns, and Lehman this time around? And can we deal with another shock to the system 3.5 years away from the last event?

TOC, your comment illustrates perfectly the myopia that I spoke of — yes, for the CDS purchasers, forcing a default is the “best” option for them. But the wider effect would be akin to the company that dumps toxic waste into the closest body of water, without thinking about the fact that the town the company is based in drinks that water; including all of the company employees and their families, from the CEO to the janitor. Every dollar of par recovered by a CDS purchaser has to be covered by the CDS writer. There is still no such thing as a free lunch in economics.

Short term and micro self-interest smart, long term and macro self-interest stupid.