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Why is the Greek PSI poised for success?

08 March 2012 / 10:03:18  GRReporter
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The exchange procedure of Greek bonds held by private creditors, known by the abbreviation PSI, will be have been completed in less than 24 hours. The all too often conflicting information involving mutually exclusive claims by sources from the Greek government, the Institute of International Finance, Brussels and different analysts on both sides of the ocean have totally confused those keeping track of the topic. Obviously it comes down to a conflict of interest worth many hundreds of billions of Euros and to the purely philosophical question about what we lose when we gain and what we gain when we lose.

"A myth is developing that private creditors have accepted significant losses in the restructuring of Greece’s debt, while the official sector gets off scot free. This is not quite right. The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors," writes the famous economist Nouriel Roubini in a Financial Times article. He recalled that even after the private sector involvement Greece’s public debt will be unsustainable at close to 140 per cent of gross domestic product—the country is unable to serve it. At best it will fall to 120 per cent by 2020 and could rise as high as 160 per cent of GDP. Why? A “haircut” of 110 billion Euros on privately held bonds is matched by an increase of 130 billion Euros in the debt Greece owes to official creditors.

Of these, 30 billion Euros will go directly in cash to the accounts of private creditors, and this is the first "sweetener" for them from the transaction of the Greek PSI. Another at least 25 billion Euros from the European Financial Stability Facility to the Greek government will go towards recapitalizing banks in a scheme that will keep those banks in private hands and allow shareholders to buy back any public capital injection with sweetly priced warrants, claims Nouriel Roubini. He recalled that the new Greek bonds, which will replace the ones now owned by creditors, are registered under British and not Greek law. If Greece leaves the Eurozone, the bonds will remain in Euros and will not be automatically converted into bonds in Drachmas, which is a third big “sweetener” for private creditors.

According to the economist official creditors of Greece will suffer big losses as the country will not be able to service its debt for at least another 10 years and will not have access to global financial markets. The official sector will not go without a third bailout package for the troubled economy. "Greece’s private creditors should stop complaining and accept the deal offered to them this week. They will take some losses, but those losses are limited and, on a mark-to-market basis, the debt exchange offers them a potential capital gain. Taxpayers of Greece’s official creditors, not private bond holders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency," concludes Nouriel Roubini.

Meanwhile, the completion of the Private Sector Involvement procedure starts more and more to resemble a thriller because no more than six hours are left until the deadline, and until now news agencies around the world report that only about 70 percent of creditors have expressed a desire to participate. This rate is sufficient for the government in order for it to be able to start the collective action clauses CACs, but the higher the rate of voluntary participation, the better for Greece. If this percentage exceeds 80, then the country is in a good position to insist from the International Association for swaps and ISDA derivatives, not to count the PSI as a credit event, and thus not to allow payment of CDS-insurance against bankruptcy. If the percentage of participation exceeds 90 percent, then we can talk about successful completion of the PSI, there will be no CACs activation and the CDS-insurance will not be paid.

In addition to the known up until yesterday list of creditors, who voluntarily decided to participate in the PSI, today the Greek insurance company NP Insurance joined the list as well and voluntarily compounded 5.6 million Euros of the Greek debt. The Cypriot Greek Bank also announced its participation.

The official results of the exchange of Greek bonds will be announced by the Ministry of Finance tomorrow, March 9 at 08.00 o’clock in the morning, Athens time, at If a decision will need to be made on the collective action clauses, it will most likely be done on Monday, because tomorrow the Eurozone finance ministers will have a videoconference meeting, at which they will discuss the results of the Greek PSI. Tomorrow the Governing Board of the International Monetary Fund will meet in order to decide its participation in the second bailout package for Greece. According to unofficial data three amounts are discussed - 29, 21 and 18 billion Euros.

Tags: Greece Greek bonds PSI debt Financial Times Nouriel Roubini
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