IIF to propose two PSI alternatives

Talks between Greek officials, representatives of Greece?s international creditors and private investors begin on Wednesday in Frankfurt about the haircut to the country?s debt, with the eurozone and the International Monetary Fund refusing to rule out a haircut in excess of 50 percent or a forced participation if the voluntary one proves insufficient, as well as banks proposing terms that will lead to the least possible losses for them.

Petros Christodoulou, the head of the Public Debt Management Agency (PDMA), will lead the Greek negotiating team, having already traveled to Frankfurt last week, sources say.

The Greek side?s main proposal concerns the swap of existing bonds of 206 billion euros for new ones in combination with cash. Depending on when the existing bonds expire, for every 100 euros of nominal value private investors will get 10 euros in cash if the bond matures after 2020, 15 if it matures by 2020 or 20 if it matures by 2014. They will also get 40, 35 and 30 euros respectively in new bonds maturing after 20-30 years, with an average coupon of 6 percent.

According to calculations made by Athens, the eurozone and the IMF, this proposal would take to the reduction of the Greek debt down to 120 percent of the country?s gross domestic product in 2020. On the other hand, the Institute of International Finance (IIF) plans to table a proposal with two alternatives for private investors. Both stay within the line drawn by banks, which wish to contain their losses up to 54 percent in net present value terms.

The first alternative, which the IIF sees as likely to be favored by investors, concerns foreign bondholders, whose paper adds up to 141 billion euros and provides for a 50 percent haircut and the swap of the rest for new bonds maturing after 22 years. They will be guaranteed by European Financial Stability Facility bonds worth 29.75 billion euros and will bear an interest rate of 7 percent, or a coupon from 5.5 to 7.5 percent.

The other alternative, which the IIF expects the Greek banks and social security funds to favor, proposes a 37 percent haircut on the bonds that have a total nominal value of 65 billion euros, with the remaining 63 percent covered by new 15-year bonds with an 8 percent coupon and an additional rate based on the GDP growth rate. Both alternatives cut the debt by 45.9 percent, or 94.5 billion euros.