The elusive PSI solution
A warning that the eurozone’s financial rescue fund might get downgraded by a rating agency has raised fears that the latest second EU-IMF bailout plan for Greece, currently under negotiation and involving a 50-percent debt writedown on private bondholders, might be derailed.
The “negative watch” evaluation was issued to the European Financial stability Facility (EFSF) by Standard & Poor’s (S&P) on December 6.
To preserve its own triple-A status, the facility stopped issuing bonds to finance the bailout schemes for Ireland and Portugal, amid rising borrowing costs on some of the major eurozone countries like France, Italy and Spain, which are supposed to underwrite the EFSF lending capacity.
This followed a further twist in the deepening debt crisis a day earlier, when S&P issued a downgrade threat against Europe’s strongest economies - including Germany.
Without a way out of its present deadlock, the EFSF cannot finance a Greek rescue plan agreed at the EU summit of October 26. The plan involves a 109bn euro support programme and provides for recapitalisation of Greek and European banks, which will undergo losses through the proposed private sector involvement (PSI). The International Monetary Fund signed off on its 2.2bn euro portion, part of the current EU-IMF bailout loan’s 8bn euro tranche, on December 5.
“PSI and prolonged support at low interest rates from European partners are crucial to reduce debt to a sustainable level,” IMF managing director Christine Lagarde said in a statement on the release of the sixth loan tranche.
“Near-universal participation in the proposed private debt exchange will be important to realise a sustainable debt position, meet financing needs, and ensure continued fund support,” Lagarde added.
Terms pending
However, both the level of bondholder participation in PSI and interest rates on the new bonds remain to be negotiated by the transitional government of Lucas Papademos.
A
ccording to unofficial reports from PSI negotiations, the gulf between the Greek side and the International Institute of Finance (IIF), which represents the bondholders, has actually widened.
As the global debt crisis deepens, Greek bonds are presently trading in the open market as low as 25 percent of their face value, while bankers are facing a eurozone credit crunch that severely limits the losses they might accept voluntarily.
“The IIF wants a deal that’s attractive for the banks in the current market conditions, while the government is looking for haircut that will make the debt more sustainable,” said Helen Haworth, a bond market analyst at Credit Suisse, London.
Speaking to the Athens News, she said, “The impact of the eurozone crisis on the present stage of the negotiations means that assumptions about deficit reductions or asset sales after PSI over the next 20 years are still too optimistic.”
The IMF projections of a debt-to-GDP ratio of 120 percent in 2020 if a haircut of 50 percent on private bondholders is carried out “are very high, and this is just the base target,” Haworth noted.
PSI expectations
“The risk is what happens if that slips,” she pointed out, “
so I believe it is unlikely that Greece is going to get the PSI it needs that’s fully voluntary, so the country should prepare for tough negotiations ahead.”
Echoing similar worries, Finance Minister Evangelos Venizelos told lawmakers during a parliamentary debate on next year’s budget that Athens must achieve full private bondholder participation in the PSI to avoid a funding gap of 5bn euros in 2012.
“Talks in the following months about the full implementation of PSI to reduce Greek debt and make it sustainable are difficult, delicate and not without risk,” Venizelos warned.
Nothing is easy or self-evident,” he added. “I call on all parties of the coalition to support the prime minister and myself in the handling of the PSI.”
This may be the reason Greece is now hardening its stance towards the bondholders.
According the Greek proposal, every 100 euros of old bonds would be exchanged either with 30-euro bonds of 20-year maturity and with a 4.5 percent yield and a 10-year grace period. The new bonds would be combined with 20-euro EFSF bonds.
Under the Greek proposal,
new bonds would be governed by Greek law, to oblige a higher number of participants to accept the deal agreed with the majority of bondholders. In contrast, the IIF wants to swap bonds at 50 percent of face value with new 30-year instruments bearing an 8 percent coupon and governed by UK law, with triple-A guarantees rather than the cash equivalent of EFSF bonds.