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live The final agreement on the Greek PSI will be on Saturday

21 January 2012 / 16:01:27  GRReporter
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On Friday after midnight, another round of negotiations ended between the Greek government and its private creditors, represented by the Executive Director of the International Finance Institute Charles Dallara and the senior adviser of the French BNP Paribas Jean Lemierrere. "The elements of an unprecedented voluntary PSI are coming into place. Now is the time to act decisively and seize the opportunity to finalize this historic transaction and contribute to the economic stability of Greece, the Euro Area and the world economy" said the official release of the Institute of International Finance.
    Greek Finance Minister Evangelos Venizelos confirmed that the negotiations with the two representatives of the private creditors will continue on Saturday. On Friday, they had two meetings. One was in the morning and afterwards the two negotiating parties had parallel conference calls - the Greek Government had a conference call with the representatives of the European Union and the International Monetary Fund; and Charles Dallara and Jean Lemierre - with bankers and financiers. Both parties received support to finalize the transaction as quickly as possible.
    Late in the evening another meeting was held at the residence of the Greek Prime Minister Lucas Papadimos. According to government sources, the private creditors have agreed to slightly lower interest rates than those to which they agreed yesterday. For the bonds maturing by the end of 2014 the interest rate will be formed at 3.5 percent, for bonds maturing in 2020 - 3.9 percent, and for bonds maturing after 2021 the interest rate will be 4.5 percent. Thus with the 50-percent cut in the nominal value of the Greek debt, the net losses of private creditors as a net present value will be 68 percent. "If private creditors suffer a 68 percent net loss, isn’t it also fair for the European Central Bank to also suffer some losses?" asked rhetorically in Twitter the CEO of the largest investment fund in the world PIMCO, Bill Gross.
    And here actually begin the uncertainties about the transaction. The European Central Bank, which owns a significant part of the Greek debt, firmly refused to participate in the PSI procedure or Private Sector Involvement, arguing that it is not a private but an institutional creditor of Greece. I.e. Athens will have to pay back its full debt to Frankfurt. From all private creditors, the Greek banks have the largest share of bonds. The 68 percent cut in their net worth will eat up their balance sheets and the Greek state will have to find a way to recapitalize them in order for them to avoid bankruptcy. I.e. in the case of these creditors too, Greece will not earn particularly much from the debt cut.
    Greek securities are also owned by local insurance funds whose savings have anyway already been "eaten up", they have no available funds and cutting their revenue from the maturing bonds will simply accelerate their collapse. Around 70 billion euro of the Greek debt is held also by hedge funds, which are not represented by the International Finance Institute and refuse to engage in voluntary cuts of the Greek debt. The remaining two groups of private lenders who are holding bonds are the European and international banks as well as insurance companies among which are also the Greek ones. Effectively, the transaction which is currently being prepared will affect them directly.
    Greek Prime Minister Lucas Papademos does not preclude the possibility for Greece to oblige through legal measures the hedge funds to participate in the cutting of the debt, by triggering the so-called Collective Action Clauses or in other words the clause for a mandatory collective action.

    "Even if they reach an agreement there are going to be so many holdouts that then they’ll have a problem," commented the Nobel laureate Nouriel Roubini the negotiations for the Greek PSI. The man who earned his fame for being the best expert on world markets, believes that Athens will either pay the holdouts and that becomes expensive, or if they don’t pay them we’ll have a series of defaults, because they’re going to stop paying them. "Or the way to avoid the holdouts from being holdouts is then to change domestic legislation, to cram down the terms of the majority on the holdouts. But if that happens then the CDS will trigger and that becomes a credit event," believes Nouriel Roubini. According to him Greece will go bankrupt one way or another. He admits however that "One extreme is a default, another one is CDS triggering".

Meanwhile on Friday, the Athens Stock Exchange registered a second consecutive jump of its index, which for a second time increased its value by 2.67 percent. Thus the index was fixed at 708.18 basic points, going over the psychological barrier of 700 points. "I explain this excitement with the optimism of the investors expecting the completion of the negotiations for the PSI", commented the analyst Takis Zamanis before Reuters. According to him the terms of the agreement are very good for the Greek economy and especially the low interested rate until 2014.

Tags: private creditors Greek debt cuts PSI Institute of International Finance Charles Dallara
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