|Finance Minister Evangelos Venizelos, left, said talks would most likely resume next Wednesday [AFP]
Talks between Greece and its creditor banks in Athens to slash the country's towering debt pile have broken down, with the Greeks warning of "catastrophic" results if a deal to swap bonds is not reached soon.
The sides remain divided over the interest rate Greece will end up paying, which determines how much of a hit banks take.
Athens needs an agreement, seeing creditors voluntarily giving up a lot of their promised returns, to reduce its debt to more sustainable levels and convince the European Union and International Monetary Fund (IMF) to keep lending it cash.
The stumbling block in the negotiations was the low coupon, or interest payment, offered on the new bonds, one source familiar with the matter, and one banking source said.
"The main problem was the [EU and IMF] insistence on a coupon lower than four per cent on the new bonds," the banking source said.
It could mean an accounting loss of more than 70 per cent for banks on their books, far more than the actual 50 per cent cut in the original value of the old bonds laid down in the original deal.
Under the terms of the October plan, bondholders would take a 50 per cent hit on the notional value of the old bonds. But the actual losses on their books depend on coupon and maturity, and could be far higher.
Time is pressing, as Greece needs a deal to stay afloat when a $18.5bn major bond comes due March 20, and the bond swap paperwork alone will take at least six weeks.
Both sides appeared to be digging in their heels, in what analysts said looked like a high stakes poker game in a final attempt to convince private bond holders to take some losses to avoid a disorderly default.
It would come via a swap between old bonds teetering on the brink of default and new ones for which banks would take a big hit.
Without a deal, banks could lose even more and Greece would be threatened with default and possibly eurozone ejection.
"Discussions with Greece and the official sector are paused for reflection," said the Institute of International Finance
(IIF), which leads talks for private bond holders, in a statement.
"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward ... has not produced a constructive consolidated response by all parties."
Greek negotiators earlier warned that failure to reach a deal would be disastrous for Europe.
"Yesterday we were cautious and confident. Today we are less optimistic," said a source close to the Greek task force team in charge of negotiations.
"It is important to remind all parties that the consequences of failure would be catastrophic for Greece and the Greek
people, Europe and Europeans," the source said.
"When you're dealing with a sovereign, you don't have a huge amount of tricks up your sleeve, because if they choose not to pay you there's not an awful lot you can do," said Gary Jenkins, director of Swordfish Research.
The IIF's Charles Dallara held meetings in Athens on Thursday and Friday and Evangelos Venizelos, the Greek finance minister, said the talks would most likely resume next Wednesday.
"There is a meeting next week and we'll make every effort to succeed," the source close to the Greek side said.
The IIF said there was a "tentative" plan to meet on Wednesday, but that it depended on events in the next few days.
EU, IMF and ECB inspectors, who arrive in Athens on Tuesday for talks on a new $166bn rescue plan, also want to see a deal on the debt swap before they agree on the bailout.
Any agreement with private bond holders on debt reduction should be in line with the terms decided by eurozone leaders on October 26, the EU Commission said on Friday.