Greece is Close to a Deal

Although negotiating through the night, Greek politicians did not reach an agreement on the required austerity measures. As they have now failed to meet about five deadlines, the Greeks will have to adhere to a very tight schedule if Greece is to avert a sovereign default on 20 March, when about EUR14.4bn worth of debt matures.

However, Greek politicians are very close to the goal. The stumbling block was pension cuts worth EUR300m out of a total austerity package worth EUR3bn. We expect a solution to be found. There is a lot at stake and negotiators just need to put the last bits and pieces of the agreement together. Greece will be allowed another 15 days to find the EUR300m outstanding, the latest reports say, though other sources say they will only have until Sunday. This could pave the way for a conditional agreement.

Talks in Greece are due to continue today. The aim is to have a conditional agreement ready for final approval at the emergency meeting of Eurogroup finance ministers in Brussels at 18:00 CET today – a meeting that was called only yesterday evening. If agreement on an austerity package is reached, the EU and IMF would be able to approve the next EUR130bn Greek rescue package.

A deal paves the way for PSI and CACs
Meanwhile, the IIF (representing private creditors holding Greek government bonds) is due to meet today in Paris to make the final preparations for a possible switch of bonds.

Private investors are expected to lose at least 70% of the value of their bonds as part of a voluntary PSI deal. In exchange for their bonds they will get new bonds with a 50% haircut on the principal and a coupon starting at 3% and averaging 3.6% over the lifetime of the bond. GDP warrants are likely to be included, which will give an extra payoff if Greece delivers high GDP growth beyond 2020. 

Investors who do not accept the voluntary agreement will be forced to participate, as the Greek government will introduce Collective  Action Clauses (CACs) into Greek law imposing the terms of the PSI agreement negotiated by the IIF and the Greek government on all private investors. However, the Greek government aims to avoid harming Greeks who have put their pension savings into government bonds. Therefore, bond portfolios of less than EUR100,000 that have been held by the same investor for a long time will probably be exempt. We do not know the cut-off data for exemption. This could be 1 January 2012 or 21 July 2011, when the PSI was initially announced.

The proposed haircuts aim to reduce Greek sovereign debt by about EUR100bn, or 45% of GDP. The Greek public debt is now larger than 160% of GDP and Greece aims to reduce its debt to no more than 120% of GDP by 2020. For this target to be met, the European Central Bank must be ready to forego profits on its holdings of Greek government bonds. This could reduce Greece’s debt by an additional estimated 5% of GDP. We shall probably learn more about whether the ECB is ready to accept selling its Greek sovereign bonds at the purchase price at today’s ECB policy meeting. The ECB will not be part of the voluntary agreement, as it covers only private investors. For, as they say in Frankfurt, “the ECB is not private sector”.