Following two weeks of negotiations and two talk breakdowns, it became apparent over the past few days, that a 50% ‘haircut’ (Private Sector Involvement (PSI)) to the Greek debt would not be enough to put the country on a ‘virtuous’ path towards a 120% ratio of debt to gross national income.
To achieve this 120% benchmark, the interest rate on the new bonds must be below 3% or, if this is not possible, the €130 billion loan package for Greece must be increased. As a result of this stalemate, negotiations once again broke down on 21 January and the private lenders’ representative Charles Dallara left Athens for Paris.
Dallara is the president of the International Institute of Finance (IIF), which represents private lenders. On the other side of the negotiations table sits the Greek government, supported by the EU and the IMF. At present, the EU-ECB-IMF troika is taking care of the country's financial needs, but a long-term sustainable solution must be achieved before the beginning of March, when a huge Greek bond of €14.5bn will mature and has either to be refinanced through the new package of €130bn, as decided in the EU Summit of 28 October, or the country will go bankrupt.
For the new package to be released by the troika, however, there must be an agreement over the PSI, making the country's debt sustainable.
According to the IMF, such a virtuous path must lead to a debt to GNP ratio as low as 120% for the overall debt to be sustainable – the reason why negotiations between the IIF and Greece broke down was because it became apparent that in order for the ‘magic percentage’ of 120% to be achieved, the interest rate of the new bonds to replace 50% of the nominal value of the old must be no more that 3%, and maturities would have to be set at 30 years.
In such an eventuality, however, and assessing this probability at present values, lenders will lose 70% on their investments, much more than 50%. Inversely, if lenders are to receive new bonds at interest rate above 3%, the European Union will have to increase its contribution to more than the €130 billion level agreed on 28 October, if Greece is to achieve the 120% benchmark of debt to income ratio as the IMF demands.
Incidentally, it must be stressed that the Fund cannot support a country that is not on a virtuous path of debt reduction and the 120% benchmark is considered as being the upper limit for a country to be able to begin reducing its debts.
In any case, negotiations must be concluded before the 13 February, as the Eurogroup of 23 January decided.
Member states have already agreed to increase their contribution to the IMF to €200bn, in order that the fund can continue participating in bailing out Eurozone countries. As for the Eurogroup meeting of 23 January is concerned, the decision to postpone the agreement over the PSI is expected to be used to exert pressures on both sides of the negotiation table, the Greek government and its private creditors, aka banks. Athens has to realise some major privatisation and the European banks to accept lower interest rate on the new Greek bonds they are going to receive (swap) after the haircut.
Last but not least, after the head of the IMF Christine Lagarde met Angela Merkel on 22 January, the German Chancellor said that her country would continue to support Greece. This however does not necessarily mean that Berlin will accept an increase in the package of €130 billion in favour of Greece. In any case, the whole issue will be clarified until 13 February.
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