The European Political Newspaper
February 08, 2012, 09:56
EU UPDATE
Athens decision moves closer
The leaders of the three major Greek political parties are expected to meet Prime Minister Loukas Papademos on the evening of 8 February, to sign and seal or reject a deal to restore the country's creditworthiness, offered by the European Union, the European Central Bank, the International Monetary Fund and the country's banks.
The offer comprises a 'haircut' of 50% or €100 billion on Greece's debt held by banks (Private Sector Involvement (PSI)) and a soft-loan package of €130bn from the troika to support the country and its banks financially until Athens will be able to tap the capital markets itself to refinance its debts, hopefully by 2015.
The difficult part is that the country's new official creditors, that is the rest of the Eurozone countries plus the EU and the IMF, are demanding that Athens applies Draconian austerity measures to arrest public deficits and restructure the entire Greek economy to make it more competitive and less dependent on state subsidies and protection from competition.
The PSI
Concerning the agreement with the private holders of Greek bonds, it seems that the basic elements are there and the overall arrangement does not present any further problems. The banks have accepted a reduction of 50% on the nominal value of the bonds they hold – in return, they will receive 35% in new bonds, guaranteed by the European Union, plus 15% in cash.
The new bonds, however, will have very long maturities (around 30 years) and low interest rates, in the region of 3.5%, which means that actual losses to banks may amount to 70% on the nominal value of the bonds they now hold.
In any case it seems that more than 50% of the private bond holders are willing to participate in the swap.
To this end, Greece is expected to announce on 13 February a call to private bond holders to participate in PSI. If more than 50% (but less than 100%) of them accept the terms of the swap, Greece can activate the Collective Action Clause and impose the swap on everyone.
This, however, may be considered as a 'credit event' and thus trigger payments of Credit Default Swaps that some of the bond holders have bought.
EU-ECB-IMF
In any case, this PSI deal cannot be realised without Greece agreeing with the troika over the main package, which provides €130bn in soft loans for Greece and the commercial banks of the country. However, for the troika to release those funds, Greece must apply further austerity and structural measures. To this effect, according to information from Athens, the three political leaders are supposed to agree on the following:
In any case, this PSI deal cannot be realised without Greece agreeing with the troika over the main package, which provides €130bn in soft loans for Greece and the commercial banks of the country. However, for the troika to release those funds, Greece must apply further austerity and structural measures. To this effect, according to information from Athens, the three political leaders are supposed to agree on the following:
* The lowest legal salary-wage will be reduced by 22%, triggering more reductions in labour costs all over the country.
* The traditional 13th and 14th salaries will be maintained.
* Subsidiary pensions will be reduced by 15%.
* A long series of structural measures will be undertaken in the state sector of the economy and the administration along with 150,000 lay-offs until 2015, including 15,000 this year.
If there is agreement on all these points, Eurogroup President Jean-Claude Juncker said on 8 February that he would summon the 17 Eurozone finance ministers to Brussels on 9 February to approve the agreements, before both agreements are introduced in the Greek parliament and, after two days of deliberations, they will be put to the vote on the night of 12 February.
On 13 February, Greece will be calling on private lenders all over the world to participate in the bond swap, thus triggering the final stage of the package agreement. Athens sources close to the government say that the three leaders will definitely agree to the entire package.
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