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Broad participation of private creditors in the cutting of the Greek debt (PSI) is essential, stated in a report the investment bank Goldman Sachs. According to the bank, the fact that ownership of the bonds is dispersed among many investors and along with this the need to achieve also broad participation, so that the whole procedure makes sense, become key issues.

Citing data from the Bank of Greece, the European Banking Authority and the European Central Bank, Goldman Sachs believes that out of the debt amounting to 360 billion euro at the end of 2011, approximately 210 billion euro were in the hands of private creditors. Out of this 210 billion euro, nearly 85 billion euro is owned by Greek banks, mutual funds and others of the kind, and 55 billion euro is held by banks from the eurozone member states.

If we assume that lenders only from Greece and the eurozone participate in the PSI, then a debt of around 140 billion euro will be restructured. Moreover, as noted in the report, for a part of the debt that was written off in Greece, the government will have to resort to a new loan to recapitalize the local banks. Thus, from a debt cut of 50%, the actual benefit may ultimately not exceed 30-35 billion euro (Goldman Sachs stresses that its estimates may undergo significant change, depending on how the losses of local banks will be reimbursed).

The actual financial benefit to the viability of the Greek debt comes from the reduction of the debt held abroad. For example, if the European Central Bank and the rest of the private sector, except for the Greek banks and the banks from the eurozone, participated fully in cutting the debt, then the actual benefit to Greece could reach 100 billion euro.

But even this 100 billion euro might not be sufficient to stabilize the Greek debt, says Goldman Sachs. A further reduction of the interest rates on loans outside the private sector might be necessary. And of course, a smaller cut of the debt would further limit the effectiveness of the restructuring procedure.

The structure of PSI does not encourage broad participation

Given that a reduction of 50% of the nominal value of the debt is planned it becomes clear that it would be difficult for the private sector to be enthusiastic about participating. This is true because a slightly lower interest rate and a prolongation of the repayment term could increase its losses to 70% - 75%.

According to the report of Goldman Sachs, the structure of PSI could be different by placing greater emphasis on the reduced rate, instead of the reduced face value, which would provide more opportunities for an increase and therefore greater incentives for the participation of private creditors. It seems, however, that currently there is nothing like this in the plans of the politicians. Thus creditors will participate only if they consider that non-participation will cost them a lot, or if they are forced to do so, involuntarily.

PSI creates a «precedent»

The threat of an uncontrolled bankruptcy, which will eventually minimise the opportunities to restore medium-term bonds, but also the great pressure on the Greek banking system could be serious enough reasons for the participation of the private creditors in the programme. In case, however, that despite the threat of uncontrolled bankruptcy participation is low and restructuring becomes forced, then the manner in which creditors are treated will create a precedent that will affect the premiums and the microstructure of many European bond markets.

Some of the critical questions are:

1. How will the bonds held by the European Central Bank be treated? If they are excluded from the compulsory restructuring or if they are placed under more favorable conditions, this could give rise to disputes with private creditors.

2. How extreme will the application of Greek law be, in order to achieve specific results? In various publications, a retroactive application of collective action clauses (collective action clauses - CACs) is discussed, which will allow the majority of bondholders to make the exchange mandatory also for other holders of Greek debt. Something like that would create even greater fragmentation of the bond market, between the securities issued by the Greek State, those that are under the jurisdiction of the United Kingdom and those issued under various legal frameworks. And investors would turn to the security provided by each category of bonds.

3. Would the CDS insurances against bankruptcy be activated? This is by no means a desired result. Nevertheless, the efforts to completely avoid their activation in the event of a less voluntary restructuring would destroy the essence of insurance against the risk of a state bankruptcy. And without reliable insurance, the next best choice for protection would be the reduction of the positions on the bond markets.