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European senior officials discussed the imposition of a haircut on Greek government bonds of up to 50%, with simultaneous support for the banks and the continuation of buying of bonds from the European Central Bank, as announced by Bloomberg, citing anonymous sources.

Along with the haircut on Greek bonds, however, a commitment will be made which excludes such actions for other States which have received emergency assistance, such as Portugal, in order to convince markets that Europe has brought the crisis under control.

Based on information from Bloomberg, negotiations will continue next week.

Among European plans there is a 5-point one, which provides a solution for Greece, and would involve strengthening the European Financial Stability Fund (EFSF), new capital for banks, a new impetus to the development of competitiveness and a revision of the European treaty in order to improve economic governance.

A more aggressive proposal provides for the exchange of Greek bonds with new ones of lower face value having the guarantees of the EFSF, which is rated AAA. As noted by the sources of the news agency, the optimal choice would be restructuring with losses without guarantees.

The discussed plan for support to the banks, provides for the establishment of a fund with capital provided by the EFSF, which will have the opportunity to directly acquire equity participation in banks, providing guarantees for their obligations.

These ideas, however, have encountered resistance from Germany, which has so far argued that the recapitalization of banks should be carried out separately depending on the situation of each individual country.

Senior officials discussed a total of 7 ways of strengthening the EFSF, divided into 2 categories. The first allows loans from the European Central Bank and the second allows for its use as "guarantor" of the bonds. The European Central Bank rejected the first category, and as a result, the second seems more likely, but in order for it to be applied, the central bank should continue buying bonds on the secondary market.

Also the idea of ​​accelerating the establishment of a permanent mechanism by one year, which was scheduled for July 2013 was also supported, while discussing also the relaxing of the regulation which provides for unanimity among the members of the eurozone for the provision of assistance to a country.

At the same time the number of scenarios for the amount of "haircut" on Greek bonds is growing like an avalanche, as are the arguments "for" or "against" a haircut greater than 21%, provided for in the conditions for participation in the voluntary programme for the exchange of the bonds (PSI), which in their essence revolve around the consequences for the bond portfolios and capital adequacy of the banks.

Professor of economics at the University Torcuato Di Tella in Argentina, Juan Jose Cruces, and assistant professor in economics at the University of Munich, Christoph Trebesch, commented, in an article published in Voxeu.org, that their analysis of the restructuring of debts incurred between 1970 and 2010 provide data on the relationship between the amount of "haircut" on debt and the ease of a return of a country to the international markets.

The findings of their study clearly oppose the economic theory that the countries which have announced a suspension of payments on their foreign debt "are punished" through exclusion from the international markets. Survey data indicate that these countries recovered their access to the markets for one year only and this happened with limited impact on their borrowing costs.

Cruces and Trebesch, however, note that if attention is focussed on the amount of losses to creditors, and not on the mere fact of suspension of payments, then the results are different. For this purpose they have used and mixed data from over 200 sources for all cases of debt restructuring during the period 1970-2010. For the calculation of the amount of haircut in each case they used the difference between the present value of the old and the new securities, deducting the market interest rates that existed immediately after the exchange. Subsequently, they related the amount of haircut to the credit terms provided for each country.

In the period 1970-2010, 180 sovereign debt restructurings were carried out on in 68 countries. For countries with low and medium income, debt restructuring is common, say the researchers adding that despite the fact that there are large differences in haircut in each case, 10% -20% to 50% or even up to 90%, the average haircut amounts to 37%. That is, creditors suffer losses amounting to 37 cents for every dollar they have given as a loan at the present value. The two professors also found that while the average haircut in the middle 80s amounted to 25% in the 90's and in the year 2000 it increased to 50%.

The main conclusion reached by Trebesch and Cruces is that a greater haircut on debt is closely related on the one hand to increased borrowing costs at a later stage, and on the other hand to a longer period of isolation from international markets.

According to them, however, one must also take into account the fact that there may be considerable differences between countries that undertake a smaller or greater haircut on their debt, and ultimately these differences further affect their borrowing costs more than the haircut itself.

Also, scientists stress that the results of their study are not evidence, but only show that the greater the haircut on the debt of a country, the slower it will return to international markets and the higher the costs will be for subsequent loans.