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Greek tragedy set to 'play' until 13 February

ARTICLE | JANUARY 24, 2012 - 11:41AM

On 23 January, the Euro Working Group (EWG) and the 17 Eurozone ministers agreed to continue exerting pressure on the banks until 13 February over the Private Sector Involvement (PSI) scheme to alleviate the Greek debt.

The EWG comprises representatives of the EU-ECB-IMF troika plus those from Athens, who have jointly negotiated with Greece's private lenders the 'haircut' of the nominal value of the country's bonds by 50%.

The idea is to exchange the old bonds for new at a rate of 35% plus 15% in cash. However, the interest rate and the length of the maturities of the new bonds are of paramount importance. These two variables will determine not only the present value of the new bonds and thus the level of the haircut and the banks' losses, which are expected to exceed 50%, but also the overall amount of the Greek debt.

The Greek debt
This last estimate is crucial, because the IMF does not support countries with a debt-to-income ratio exceeding the 120% benchmark, and consequently Greece has to embrak on a 'virtuous path' leading to such a ratio by the year 2020.

So in reality, the extension of the negotiation period until 13 February has a twofold purpose. For one thing the private lenders are refusing to accept an interest rate below 4%, but at such a yearly return the Greek debt will remain way above the benchmark of 120% of GNP by the year 2020