PSI agreement remains elusive

Negotiations in Brussels between the Greek government and bank representatives over the new private sector involvement plan (PSI+) paused for a week on Tuesday following profound disagreements on certain key issues.

The two sides will resume talks next week in hopes of overcoming crucial stumbling blocks such as the level of the interest rate for the new bonds, to replace the old ones, and how the 30 billion euros, which the eurozone will provide, should be used.

Discussions are certain to take a long time, suggest observers, who add however that a clearer picture about a deal should emerge after 10 days.

Greece is proposing that the 50 percent haircut be followed by the issue of new bonds corresponding to 35 percent of the value of the old ones, with the remaining 15 percent paid in cash. The coupon of the new bonds will range between 4.5 and 5 percent. In net present value (NPV) terms, that would entail 70 percent losses for banks.

Private sector bondholders agree to a 50 percent slash but wish to reduce their NPV losses to 52-54 percent, which is why they are asking for an interest rate starting from 8 percent and increasing according to growth of the Greek gross domestic product. They also want the 30 billion euros from the eurozone to be used as guarantees and not for cash payments.

Negotiations are being conducted in a particularly negative climate for the eurozone and especially Greece. After the negative forecast by the Organization for Economic Cooperation and Development (OECD) on Monday, Citigroup yesterday issued an even gloomier report, suggesting that Greece will remain in recession until at least 2015.

While almost all reports on Greece for 2013 forecast a return to growth, Citigroup expects the economy to shrink by 3.1 percent of GDP during that year, after coming to 5.6 percent this year.

Citigroup further anticipates the jobless rate to soar to 21 percent by 2013 and the budget deficit to amount to 21.5 billion euros next year and 11.7 billion euros in 2013. The public debt is seen growing to 295 billion euros in 2012 and to 301.4 billion euros, or 150.9 percent of GDP, in 2013.