PSI alternatives under discussion

Given Germany?s insistence on a bigger Greek bond haircut than that agreed on at the July 21 eurozone summit, the European Commission and banks are seeking a solution with a voluntary character in order to avoid a full default with unforeseeable consequences for the banking system and the eurozone.

A new round of talks began on Wednesday between the Institute of International Finance (IIF) under its managing director, Charles Dallara, and technocrats from Brussels headed by the president of the Economic and Monetary Committee, Vitorio Grilli, in order to examine the options for a voluntary but bigger haircut.

The original agreement in July had provided for 21 percent losses for banks and a decline in the nominal debt of 11.5 percent. The IIF has tabled a proposal for banks to take losses of up to 40 percent in net present value. Commission officials told Reuters yesterday that the proposals on the table involve a haircut of 30 to 50 percent.

?A voluntary participation is the target, for now at least, and many feel strongly that we must avoid any risk of a full default,? a Commission official who preferred to remain anonymous said.

Kathimerini understands that the IIF and Brussels are seeking ways to convince more investors to heed the IIF?s proposal that provided for the exchange of existing bonds for new ones, maturing after 30 years, bearing a value amounting to 80 percent of the old ones (i.e. a 20 percent haircut) and an interest rate between 6 and 6.8 percent. The latest proposal now concerns 70 percent of the original value with a significantly reduced yield (between 4.5 and 5 percent), to mature after 35 years.

It remains unknown to what extent private investors will accept such dramatic changes, and in this sense everything is still up in the air. The Association of German Banks reiterated on Wednesday that it is against a change in the private sector involvement (PSI) terms.

Outgoing European Central Bank Governor Jean-Claude Trichet stated that Greece needs a large adjustment to correct the errors of the past, in the greater interests of the country and in the interests of growth and sustainable job creation. He also called on eurozone governments to implement the decisions taken on July 21.

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