With the head of the International Institute of Finance (IFF) Charles Dalara in Athens on 11 January, it seems that the IIF is about to agree on the details of Private Sector Involvement (PSI) in alleviating the country's sovereign debt crisis.
Dalara will meet Greek Prime Minister Loukas Papademos and Finance Minister Evagelos Venizelos – what has already been decided refers to the percentage of the ‘haircut’ of the Greek bonds held by private lenders, aka banks, and the interest rate of the new bonds to replace the old.
The haircut will remain at 50%, as decided on 28 October in Brussels by the European Council, while the interest rate will be at around 4%. It also seems that the two sides have agreed that the new bonds will also be under the jurisdiction of the EFSF.
There are, however, other issues that need to be discussed and agreed upon, and these are the “growth premium” of the interest rate requested by the IIF and the compulsory nature of the PSI for the few lenders who do not agree to participate willingly.
The final PSI agreement is expected to reduce Greek sovereign debt by €100 billion, approximately one third, and bring it to 120% of GNP by the year 2020, as well as provide a ten-year grace period to Athens and push back payments by at least ten years, all of which aim to make the Greek debt affordable.
As far as the rejection of the PSI agreement by some debt holders is concerned, as was the case with some hedge funds holding Greek debt paper, the IIF appears ready to accept that if the participation of the rest of the creditors reaches a high majority level then the agreement will automatically be extended to all parties without being considered as a credit event, which would have triggered the payment of CDSs.
The other issue under discussion is the ‘growth premium’ on the interest rate of the new bonds that the IIF is requesting. The idea is that if Greece returns to a strong growth path, its creditors should be rewarded for having assisted by giving them a growth related component to the interest rate on the new bonds.
In any case, the two sides do not seem to be very far apart and that is why Finance Commissioner Ollie Rehn said on 10 January that an agreement for the Greek PSI was “imminent”.
After this is achieved, the country and the troika of its creditors, the EU-ECB-IMF, will sign the second package to provide financial support for Athens to the year 2015. After that, Greece is expected to return to viable growth, having fulfilled all its commitments to the troika.