Eurozone once again whipped by Greek winds
The details of Private Sector Involvement (PSI) in the Greek debt ‘haircut’ is presently the critical issue on which will be judged not only the prospects of Athens regaining the possibility of self-financing its debts sometime around 2015; the outcome of negotiations on PSI will also define the overall ability of the Eurozone to regain a long-term sustainable financial equilibrium.
Last week, negotiations over the Greek PSI were abruptly halted when the negotiators of the International Institute of Finance (IIF), which represents the majority of private lenders to Athens, left the Greek capital to return to New York, complaining that the EU representatives were backing down from the principles set at the EU Council of 28 October.
At this point, it must be clarified that there are three parties in these negotiations: Greece, represented by Finance Minister Evagelos Venizelos, the EU-ECB-IMF troika that is currently financing Athens, and the IIF. The basic principles for PSI is that private lenders to Greece will accept a 50% reduction on the nominal value of the debt paper they hold and receive 15% in cash and 35% in new bonds guaranteed by the European Financial Stability Facility (EFSF).
The problem, however, is that at the end of October 2011, a number of hedge funds (most of them controlled by ‘money sharks’) were very active in buying Greek debt in the secondary market at prices ranging from 40% to 50% of nominal values.
If these ‘investors’ are to be given the terms agreed on 28 October, it will represent rewarding the worst practices of financial profiteering. In any case, the all-party agreement on PSI operation has been planned to leave Greece in a position to be able to reduce all its sovereign debt at the level of 120% of GNP by the year 2020. The 120% of GNP threshold of indebtedness is considered by the IMF as the upper limit of debt to GNP ratio, permitting to the Fund to continue financing the country.
Negotiating PSI
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