Latest Developments in Greek PSI Talks: Back to a War of Attrition?

Following last week’s confusion and in light of the approaching maturity of €14.5 Bn Greek sovereign bonds, I take the next lines to consider the developments in the ongoing Greek fiscal crisis. I begin with an overview of the events leading up to this media cycle, before proceeding to describing the state of Greek public debt and the bond maturities calendar for 2012. I then move on to the actual summary of recent events before considering the potential developments and crises ahead.

Political and Media Context

This media cycle, focused on the IIF negotiations with Greece, started in January 2012 and followed the Fiscal Compact crisis of December 2012. Of course the issue has been boiling since Germany and France demanded it as a condition for the EFSF to provide €97 Bn of a total €109Bn in a second bailout programme for Greece agreed on July 21 (with the extra €12 Bn provided by the IMF). More attention was then paid to this on October 21 when, following the fifth review of the economic adjustment programme for Greece, the Eurogroup agreed it would “conclude a secondeconomic adjustment programme for Greece, with an appropriate combination of additional newofficial financing and private sector involvement.” Following this, a preliminary deal was reached on October 26, when  this programme was “expanded” to €130 Bn of assistance to Greece. This would consist of  a “PSI package up to 30 bn euro”, while “the official sector stands readyto provide additional programme financing of up to 100 bn euro until 2014, including therequired recapitalisation of Greek banks.” . However, since then it took a back seat to the Italian and Greek government collapses, to monetary policy shifts, to the Franco-German Fiscal agreements, “decisive” Council meetings and the British veto. With the changes to the composition of the Governing Council of the ECB and its large intervention at the end of December 2012, a lot of analysts seem to have calmed down about Euro-Zone political fights and demands of more integration. So the news turned to the only story around, the old Greek PSI talks and the conditionality of the IMF that an agreement be reached before it disburses the first tranche of the second Greek bailout.

Fiscal Context of Greek Environment

At present, Greece’s debt is worth 162.8% of GDP and this is forecasted to grow to a massive 198.5% of GDP during this year.

Moreover, the total volume of Greek debt maturing in 2012, debt maturing in March, is foreseen to be above €25Bn.

The main concern of the Greek fiscal crisis is that it fails to meet the funding  deadlines for maturing debt. The PSI talks were not different nor do I expect future crises to be either.

Recent Developments in PSI Negotiations 

The best summary of the present situation is undoubtedly provided by the FT Brussels blog. According to that blog post, after confusion last week over whether an agreement had been reached or not, Greek bond holders accepted a haircut of just over 70% of the value of their assets, on Monday, January 30. This roughly corresponds to €100 Bn of Greece’s total €354 Bn in debt (+/- 28.24%). This is substantially more than the €30 Bn initially mentioned as earmarked for a bond swap in January 2012. My understanding is that this is not necessarily the final deal, but it should provide a template for the final deal with the IIF, which is expected to be signed during the weekend.

However, this does not solve the Greek problem. Indeed, in order to qualify for the promised IMF funding, the IMF stubbornly demands that some deal must be reached whereby its forecasts foresee a stabilization of Greek debt at 120% of GDP by 2020. On the other hand the EU, lead by Germany, has demands of its own for the terms of disbursement of the tranches of the second bailout agreement, namely ” cutting the monthly minimum wage and the traditional two-month salary bonuses granted to private sector workers”. Since Monday, January 30 , the deadlock is no more the PSI talks, according to the FT, but rather on the ability of the present technocratic government to find legislative support for these measures who are facing a very discontent society. But even then, problems will remain.

Back to the War of Attrition? May be not…

It is likely that all of these efforts by Greece won’t be enough. In this case the EU will have to come up with the money to make up for the shortfall. Assuming that the Greeks do everything that is asked of them, there is still a chance that the crisis might be prolonged as the Council, the Commission and the ECB decide who bears the weight of coming up with the shortfall. Therefore we may yet again be back to a war of attrition:

  • According to that FT Brussels blog post, the ECB “holds about €40bn in Greek bonds, purchased in 2010 in a failed attempt to stabilise the Greek bond market (…) at about 75 per cent of their face value, meaning the bank stands to make a significant profit if the bonds are fully paid upon maturity”. One plan sees the ECB monetising Greek debt to the tune of the remaining 25% of those profit (around €15 Bn) this could help make up for the shortfall.
  • The Council could also play a role and use the EFSF to assist Greece. Such decisions are political and therefore delicate, particularly during French presidential election and on the eve of a German parliamentary election. Notwithstanding this, according one plan described by Bloomberg, “the ECB could sell its Greek bonds to the European Financial Stability Facility at the price it paid for them rather than accept a loss along with private creditors, two of the people said. The EFSF is against that proposal because it may stretch its capacity, the officials said.”

Not to honk my own horn, but I predicted such a “Public Sector Involvement” back in June 2011.

Anyway, let’s wait and see. May be the next 45 days will be interesting. For the sake of Greece and possibly the rest of us, I hope not.

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