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Rushing to complete the PSI out of fear for bigger cuts

08 January 2012 / 14:01:59  GRReporter
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Greek banking sources said for Kathimerini newspaper that talks between the government and private creditors regarding the 50 percent Greek debt remission will be completed within the coming week. Interest rates on the new bonds will range between 4 and 5 percent depending on the maturity of the securities. It is expected that the participation in the programme PSI - Private Sector Involvement will be great. "We see a sharp deterioration in the international economic situation, banks in Europe have become increasingly unstable, and Greece is the most vulnerable. If the PSI negotiations do not end quickly there is danger that creditors will not only lose 50 percent, but all the money they have given to Greece."

The news that private creditors and the Greek government are close to an agreement was confirmed also by the Executive Director of BNP Paribas Baudouin Prot, who in an interview for BFM Radio estimated that this will happen literally in the next few days. "The rapid and successful conclusion of negotiations will be one of the conditions at the beginning of 2012 to stabilize the Eurozone." BNP Paribas is one of the Management Committee members negotiating with the Greek government on behalf of the creditors. In the last weeks of 2011 the French bank announced its withdrawal from the Greek market due to the failure of Athens to settle with creditors.

Meanwhile, in an article for The Financial Times newspaper the manager of the Central Bank of Cyprus Atanasios Orfanidis argued that with their decision from 26-27 October to involve private creditors in the Greek debt remission European leaders have done great damage to investor confidence in the Eurozone and have caused the spread-performance increase of the member states. Orfanidis proposes the cancellation of the PSI programme and instead for Greece to be granted with a new 30-year loan with lower interest rates, which will have the same effect on the debt service, but will restore investor confidence.

Expedience and effectiveness of the PSI is obviously the mostly discussed topic among financial circles in the world, because even the chief economist of the International Monetary Fund, Olivier Blanchard, talked about it in an interview with CNBC. "We need to make further cuts on the Greek debt in order for the country to be able to take a breath. Of course, it will have to make even greater restrictions and reduce wages." In this way even the Monetary Fund officially recognized the need for bigger remission of the Greek debt.

Also according to sources from the German magazine Spiegel the International Monetary Fund believes that the programme for financial stabilization of Greece is not enough and the country has not taken the necessary measures so as to avoid bankruptcy and to achieve the targets agreed on with creditors. According to Monetary Fund experts there are two solutions for Greece - either to take new measures for financial stabilization, or Eurozone countries will have to vote for a new, third rescue package. Referring to an IMF document the magazine argues that "Greece should take more vigorous measures in order to stabilize its public finances. Otherwise its private creditors will refuse to participate in the 50 percent debt ‘haircut’." According to Spiegel magazine the same document discusses the unreasonably delayed privatization plans in Greece and the unforgivable failure to collect taxes.

According to the German Ministry of Finance the danger of a new third consecutive PSI programme (the first was for a 21 percent cut, while the current second is for a 50 percent debt ‘haircut’) is very real. However the Ministry offers for it not to be voluntary, but mandatory even if it triggers a credit event and insurance against CDS default. Clemens Fuest, adviser to the German Finance Minister Wolfgang Schaeuble, claims that the 50 percent ‘haircut’ on the Greek debt is not sufficient to ensure maintenance of the remaining 50 percent.

Tags: BNP Paribas Greece creditos debt remission IMF
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