Conditionality is vital, not PSI
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Conditionality is vital, not PSI – Law – Civil Law
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If local politicians and the press were right, an agreement on the bond exchange — widely known as PSI+ — is perhaps the most important step in Greece’s quest to receive the second bailout package of 130 billion euros from the country’s international creditors.
However, although the private sector involvement plan is significant, it is not as crucial as an agreement between the government and the troika on conditionality, namely the conditions attached to the new loan and their use. Less than a week or so before the chief inspectors of the troika — representatives of the European Commission, the International Monetary Fund and the European Central Bank — arrive in Athens for what could be a make-or-break mission for Greece, many in the country seem to be focusing more on the financing component of the economic adjustment program rather than the most important, namely conditionality.
There is no question that the reduction of the country’s public debt by some 100 billion euros envisaged in PSI+ is important for the debt to become sustainable. Readers are reminded that Greece is asking its private bondholders to voluntarily accept a 50 percent haircut to the 206-billion-euro debt and receive some cash and new, 20-30-year bonds. If one believes local bankers and government officials, there is reason to hope negotiations or, better, talks — there is a significant difference in using the word “talks” instead of “negotiations” according to legal advisers if the bond exchange is to be deemed voluntary — will conclude soon. However, an agreement on the terms of voluntary PSI+ between Greece and the banks does not guarantee its success. First, the 2012 Greek budget calls for a very high participation rate, around 92 percent or higher, to reap interest savings of 3.5 billion euros or more but this is highly doubtful if the bond swap is to remain voluntary.
Greece could impose the terms of the PSI agreement on the holdouts to achieve a 100 percent participation rate, but that would almost certainly be deemed a credit event, triggering credit default swaps on Greek bonds. It is noted that a buyer of CDS can either offset his loss on his bond portfolio when the contracts are triggered or make a profit if he holds no bonds, that is, bought them for speculation. Second and most important for PSI, even if one assumes the kind of participation rate sought by the government, the bond exchange may not take place if the temporary European Financial Stability Facility does not provide private bondholders with 30 billion euros in cash or collateral for the principal of the new long-term bonds.
Moreover, it is known that PSI+ will create a sizable capital shortfall for Greek banks which will likely be augmented by the results of the diagnostic tests on their loan portfolios conducted by BlackRock Solutions. That’s why some 30 billion euros has been earmarked for their recapitalization from the second bailout package.
This is not to mention the guarantees the EFSF will have to provide the ECB for the period Greece will be rated in selective default by at least two major credit rating agencies, namely S&P and Fitch. The ECB needs those guarantees to keep Greek banks afloat during this period. Needless to say, things will get tougher if the country makes the bond swap mandatory because it will likely end up in default, and not just selective default, as viewed by the major credit rating agencies. In other words, even if there is an agreement on the terms of PSI+ and a high participation rate is ensured during the offer period, the implementation, namely the settlement, will not go ahead unless lots of money is made available by the country’s international creditors. This is not to mention the possible problems EFSF may have in raising cash because it is assumed it will be able to honor its commitment by giving promissory notes to private bondholders and local banks. However, it should be considered that some of Greece’s official creditors will not give the go-ahead for this large sum to be disbursed upfront unless there is an agreement with Greece on conditionality.
The latter aims to ensure the country will apply the agreed fiscal and structural policies for the loans to be recovered later on. This may sound easy but it is not, since the negotiations will take place between the troika and members of the interim government who do not belong to the conservative New Democracy, leading in the polls and favored to win the next general elections. Although the conservatives back the interim government, they have tried to keep a distance from it and have stated their objection to certain economic policies, most prominently tax hikes and horizontal pension and wage cuts in the past. They have also stated their intention to renegotiate parts of the economic adjustment program. So it is interesting to see how they can be engaged in the negotiations over conditionality, a precondition for PSI+ and the second bailout package aside from being called to vote for it in Parliament. It is known from IMF conditionality in the previous decades that program success is closely related to its domestic acceptance and not external imposition.
The Greek program has failed to gain a good deal of domestic acceptance so far. For Greece to be funded in the next few years and not default in March, an accord on conditionality is more crucial than an agreement on PSI+. However, it may not bear fruits ex ante if New Democracy is not engaged in the negotiations and the troika does not learn from its mistakes by accepting some of the conservatives’ position on taxation.
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Our Detective Agency operates successfully as an independent private business of Zakynthinos™ S., a Licensed Private Investigator. It?s no coincidence that our business,is the first Private Investigation Agency in Greece and among the 3 such Agencies in Europe to be Certified to the ISO 9001/2008 for the Quality Management of the Services offered.Throughout our long-term Professional involvement with Greek Society, we have shown that deep understanding of real customer requirements is the key to our success.
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Our Detective Agency operates successfully as an independent private business of Zakynthinos™ S., a Licensed Private Investigator. It?s no coincidence that our business,is the first Private Investigation Agency in Greece and among the 3 such Agencies in Europe to be Certified to the ISO 9001/2008 for the Quality Management of the Services offered.Throughout our long-term Professional involvement with Greek Society, we have shown that deep understanding of real customer requirements is the key to our success.
Use and distribution of this article is subject to our Publisher Guidelines
whereby the original author’s information and copyright must be included.
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