WEDNESDAY, 18 JANUARY 2012
The PSI’s enigma—and a possible solution
The highly respected Greek Economists for Reform group published today an article of mine.
Read the rest on Greek Economist for Reform or below:
The Greek government is currently preoccupied with solving the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU, which is necessary to pay the bond maturing in March. Failing this and in absence of an alternative it would be very hard for Greece to avoid a disorderly default with unpredictable consequences both for Greece and the rest of Europe. This article, written by guest contributor Andreas Koutras, briefly reviews the decisions and history that led to the current impasse. It further proposes a modification to the PSI that could significantly improve the chances of success and could also give Greece the necessary breathing space to effect economic change. The proposal is within the realms of the EU council’s decisions and involves the voluntary sell back by the ECB of its holdings at cost and adding the option for private bondholders to exchange their holding for cash. This would greatly increase the probability of a successful PSI without endangering the government bond markets or risk contagion and default.
The full article of A. Koutras:
The Greek government is currently preoccupied with the solution to the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU which is necessary to pay its March bond if it is to avoid a disorderly default.
Historical context
Back in July 2011 the European Council took the decision to share the burden of the Greek bailout with the private sector (as opposed to the official sector i.e. ECB and Sovereigns). This was not surprising at all. The majority of the private investors are institutional investors with well remunerated professional experts and risk analysts. Their investment decision was taken after considering the risks of non-payment. There are very few innocent retail investors with Greek bonds (around 5% or 10billion in total). Thus, it is only natural for them to bear some of the pain of their decisions. One however, could argue against this line of reasoning; Greece misinform them of the true risks, as it provided wrong debt and deficits statistics and engaged in debt beautification practices for many years (as far as I know, no one has taken Greece to court for this). Incidentally, this is a much stronger argument than the one supporting the ludicrous odious debt case.
In all debt restructurings, the practice of burden sharing and of joint workouts is standard and Greece is no exception. When borrowers find themselves in hard times they negotiate with their creditors to find an acceptable solution. What made the EU council decision rather exotic is that it insisted on a voluntary workout, with the ECB being exempted from any burden sharing. The EU insisted on a “voluntary” workout because it was told (correctly) that any coercive restructuring or workout would be an event of default. And European politicians wanted to avoid a default at any cost. Their insistence had more to do with the stigma of being a failure and their abhorrence of rewarding the free market (CDS speculators) rather than any hard logic or financial rationale. But perhaps the factor that was paramount in the minds of many politicians was the taxpayer funding of the bailout. Greece no longer had the sympathy of the average European taxpayer who was effectively paying for Greece’s bailouts. Spending more taxpayer’s money became politically unacceptable and a solution had to be found with the right connotations. In the words of Commissioner Olie Rehn, “We all know what to do, we just don’t know how to do it and get re-elected”. Thus the PSI was born. The EU council’s decision on the PSI could therefore be reworded as follows:
We invite the private bondholders to voluntarily reduce their wealth for the benefit of the common good (us politicians becoming electable again). If you do not wish to participate we would not coerce you or punish you and by the way the largest holder of Greek bonds the ECB would not take part in this wealth reduction.
Read the rest on Greek Economist for Reform or below:
The Greek government is currently preoccupied with solving the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU, which is necessary to pay the bond maturing in March. Failing this and in absence of an alternative it would be very hard for Greece to avoid a disorderly default with unpredictable consequences both for Greece and the rest of Europe. This article, written by guest contributor Andreas Koutras, briefly reviews the decisions and history that led to the current impasse. It further proposes a modification to the PSI that could significantly improve the chances of success and could also give Greece the necessary breathing space to effect economic change. The proposal is within the realms of the EU council’s decisions and involves the voluntary sell back by the ECB of its holdings at cost and adding the option for private bondholders to exchange their holding for cash. This would greatly increase the probability of a successful PSI without endangering the government bond markets or risk contagion and default.
The full article of A. Koutras:
The Greek government is currently preoccupied with the solution to the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU which is necessary to pay its March bond if it is to avoid a disorderly default.
Historical context
Back in July 2011 the European Council took the decision to share the burden of the Greek bailout with the private sector (as opposed to the official sector i.e. ECB and Sovereigns). This was not surprising at all. The majority of the private investors are institutional investors with well remunerated professional experts and risk analysts. Their investment decision was taken after considering the risks of non-payment. There are very few innocent retail investors with Greek bonds (around 5% or 10billion in total). Thus, it is only natural for them to bear some of the pain of their decisions. One however, could argue against this line of reasoning; Greece misinform them of the true risks, as it provided wrong debt and deficits statistics and engaged in debt beautification practices for many years (as far as I know, no one has taken Greece to court for this). Incidentally, this is a much stronger argument than the one supporting the ludicrous odious debt case.
In all debt restructurings, the practice of burden sharing and of joint workouts is standard and Greece is no exception. When borrowers find themselves in hard times they negotiate with their creditors to find an acceptable solution. What made the EU council decision rather exotic is that it insisted on a voluntary workout, with the ECB being exempted from any burden sharing. The EU insisted on a “voluntary” workout because it was told (correctly) that any coercive restructuring or workout would be an event of default. And European politicians wanted to avoid a default at any cost. Their insistence had more to do with the stigma of being a failure and their abhorrence of rewarding the free market (CDS speculators) rather than any hard logic or financial rationale. But perhaps the factor that was paramount in the minds of many politicians was the taxpayer funding of the bailout. Greece no longer had the sympathy of the average European taxpayer who was effectively paying for Greece’s bailouts. Spending more taxpayer’s money became politically unacceptable and a solution had to be found with the right connotations. In the words of Commissioner Olie Rehn, “We all know what to do, we just don’t know how to do it and get re-elected”. Thus the PSI was born. The EU council’s decision on the PSI could therefore be reworded as follows:
We invite the private bondholders to voluntarily reduce their wealth for the benefit of the common good (us politicians becoming electable again). If you do not wish to participate we would not coerce you or punish you and by the way the largest holder of Greek bonds the ECB would not take part in this wealth reduction.
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