Whose PSI is it anyway?
Posted by
Joseph Cotterill on Dec 12 16:34.
As regards private-sector involvement, we have made a major change in our doctrine: from now on we will strictly adhere to the IMF principles and doctrines… Or, to put it more bluntly, our first approach to PSI, which had a very negative effect on debt markets is now officially over.
That would be Herman Van Rompuy, talking gibberish about debt restructuring to journalists (
via Bloomberg) way back at Thursday evening’s Eurofudge summit. This is
prime Eurofudge, and just as important relative to what the summit did about structural deficits, automatic consequences for deficit failures, and so on.
To begin with
… Greece’s PSI — the biggest sovereign debt restructuring in history, affecting some €200bn of private bondholder claims: hardly chump change — is anything but ”officially over”. No airbrushing that one out of history please, thank you very much. Especially not this week! The Greek finance minister took to the wires on Monday to promise that Greece will wrap up
talks with bondholders by January. As John Dizard writes, this used to be December, and it’s still not clear if the “voluntary” deal will achieve sufficient take-up not to go coercive. So, the Greek bond offer is festering away still.
But most of all,
“IMF principles and doctrines” don’t really mean as much to how sovereigns negotiate with their bondholders as the eurozone leadership appears to think (or wants investors to believe).
Invoking the IMF on PSI – almost to imply that there will be no restructuring whatsoever in future — certainly has become an odd meme of late. Sure, there is a role in PSI (more like
around PSI) for the IMF, but it’s not the one the eurozone seems to want to copy, which is as some sort of last-resort arbiter that will “strictly adhere” to a magic rulebook.
It’s firstly worth pointing that the “rules of the game” in a sovereign debt default just can’t work like that, whichever organisation is tasked with applying them. There is no magic rulebook because creditors exist in effectively a kind of anarchy with sovereign debtors. Sovereigns will typically enjoy legal immunity unless they specifically sign it away in the bond contract, they don’t collateralise their debt with recoverable assets, or offer senior versus junior debt. Even if they do any of that,
it is generally very hard to extract assets from a sovereign, even if you litigated against them and won a remedy for your restructured or defaulted bonds. Equally the creditors can stop a sovereign accessing the market.
That simply makes one basic and rather loose rule – maintaining good faith and flexibility on both sides – extremely important, and limits the enforcement of rules without good faith. It’s like a hotline between two countries that hate each other. They still see the value of talking and setting some ground rules. ‘Good faith’ can mean warning creditors in good time that you’re unlikely to pay them in full, i.e. not waiting to tell them (and also the IMF whom you want loans from!) that the last camel has been shot at dawn, in Lee Buchheit’s
phrasing. It’s also about providing bondholders with equality of treatment on their debts — even if it’s going to be a very harsh set of write-downs.
We’ll get to the eurozone’s
fabulous record (not) on ‘good faith’ in PSI in a moment.
But overall it means that most PSI ‘rules’ are applied between the sovereign debtors and their creditors on an ad hoc basis. Sorry, no formulas for PSI
a priori here. But there is a set of principles (not laws!) which set out these loose rules. You can find them
here. As principles formed in response to emerging-market sovereign debt crises going back 30 years, they are reviewed every year when the Paris Club of creditors meets, and generally get looked after by the Institute of International Finance and other industry bodies.
This is what the principles say about good faith, which we pick out because they mention the IMF:
You can see why “voluntary amendment” might be a forlorn hope generally, but at least they try.
The point is, though, the IMF’s job on PSI isn’t to run the whole process. Sure, there’s a line there about the IMF not encouraging debtors to default, but also something about the IMF
lending into arrears, or lending to sovereigns when those sovereigns can’t pay private creditors and are defaulting, in the hope these loans help a better work-out of debt. (It’s a bit like debtor-in-possession financing in corporate bankruptcies. DIP financing is senior, not unlike IMF loans’ seniority to bondholders.)
So the most clear “IMF principles and doctrines” on PSI are when things are already quite bad. The IMF can do a debt sustainability analysis and conclude there is no hope for the sovereign, in theory, preventing lending into arrears. Somehow we doubt that’s what Herman meant by invoking the IMF. Anyway, a measure of good faith (even though all restructuring negotiations are fractious) precedes IMF involvement in PSI, it seems.
It’s at this point then that we note how badly the eurozone official creditors trashed good faith in Greece (while also letting eurozone core banks get away with murder procrastination on provisioning against losses before Greek PSI began).
Exhibit A here is probably excluding the ECB’s Greek bond holdings from the debt exchange, threatening intercreditor equity. It’s a story we’ve often told before, but the scar this will leave on bondholders’ minds will remain far longer than this promise to behave on PSI, we think.
So there you are. Observing a modicum of good faith matters more (especially when everyone is going to have to swallow huge losses in any event) than pretending you’re following some “IMF” rules.
Will the eurozone listen? No. Does it matter, since they are now promising never to do PSI again anyway? Yep. Don’t believe that.
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E' evidente che stanno cercando di spaventarci 