Greek PSI geared up to cause chaos
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People and MarketsComment

Greek PSI geared up to cause chaos

The Greek debt burden, we are often told, is a trifle compared to the rest of Europe’s debt woes. But the Private Sector Initiative, first touted in the summer and designed to help banks and sovereigns alike through the crisis, is still causing headaches for participants. It threatens to devastate all attempts to restore confidence to markets.

The core of the debt crisis is the sheer volume of outstanding government debt and how much of it is held by banks. Compared to that a few billion euros here or there of Greek debt is mere bagatelle. And yet the scheme’s architects and participants cannot seem to thrash out terms for the exchange.

The haircut required keeps rising — or at least looking like it will rise — and the four options available for bondholders to buy into presented back in the summer are now, if some of the speculation on the Street is true, about to become one option with a collective action clause in it.

Frankly, it doesn’t matter whether that rumour is true or not. The point is, it is out there and exemplifies the lack of clarity surrounding the process. The Greeks themselves have hardly been forthcoming with progress reports.

This deal needs finalising if it is to go ahead because it sets a precedent for bigger bond markets. The scheme has always had to balance a number of competing interests rightly or wrongly from getting lousy investments off of bank balance sheets, to bringing down the Greek debt burden to avoiding triggering a credit event in the CDS market. No wonder it has been hard to agree terms.

But if a scheme is not sorted out — and there will be pain to bear for banks and sovereigns no matter what — then it is tantamount to saying Greece and by extension the other troubled European countries, can do nothing to solve their debt problems in the immediate term without defaulting in an orderly fashion or otherwise.

With austerity measures proving unpopular to the point of mass protest, even civil disorder, and ineffective in terms of stimulating growth, can Europe’s politicians really be relied upon not to take the default route in a bid to keep power? For such a small number of bonds, the stakes could not be higher. The clock is ticking.

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