A new negotiations round was concluded on 13 December in Athens between the Greek government and the representatives of its private creditors, aka banks, over the application of the Private Sector Involvement (PSI) in cutting down the country’s debt, namely a debt ‘haircut’.

Under the general terms of the European Council’s 26 October Agreement, the PSI will contain a 50% reduction of the debt to be included in the agreement and the lenders receive 35% of the value of new bonds guaranteed by the European Financial Stability Facility, presently carrying a triple-A rating, plus 15% in cash, and the interest rate on the new bonds cannot be higher than the average interest rate of Greek bonds at present.

It must be remembered that the exchange is optional for lenders – negotiations cover the terms and the procedure of the swaps and the interest rate of the new bonds. According to the representatives of the two sides, the latest offer by the banks is closer to what the Greek government had originally proposed. The Greek treasury has offered a 4.5% interest rate on the new bonds to banks, while the banks themselves had been asking for around 7.5-8%.

The truth is, however, that the Greek bonds that the lenders now hold are valued in the secondary market at around 40-50% of their nominal value, and the banks that will not participate in the PSI may end up holding worthless paper. In any case, there is information that the banks are quite willing to participate in the swap, but the issue of interest rates is crucial. In any case, it seems that the interest rate gap between what the Greek government is offering and what the banks can accept has decreased, but none of the negotiators are giving any hints as to exactly what happened on 13 December.

Well-informed market sources in Athens say that there is now large-scale buying and selling of Greek debts in the secondary market, with buyers acquiring bonds at discounts as large as 60% off nominal values, hoping to exchange them with triple-A rated bonds guaranteed by the EFSF, plus a portion in cash, thus making a good, quick profit – sellers include large European banks that have decided to write off a large part of their Greek bond portfolio. Negotiations are expected to be concluded during January 2012 and the swap to be realised before the end of March.

Government sources say that the Greek treasury expects participation by banks with a nominal worth of bonds of €205bn in the PSI scheme – the Greek government is represented in the negotiations by Finance Minister Evagelos Venizelos, while lenders’ interests are being taken care of by the International Institute of Finance, under its President Charles Dalara.