Reports suggest a second haircut is under discussion

Greece may require another bond haircut, this time with so-called Official Sector Involvement (or OSI, a term which refers to a restructuring of the debts held by Greece?s international creditors) in order to render its debt sustainable, with talks on how this could be done already taking place, according to reports in Germany.

Financial Times Deutschland reported Friday that talks in Brussels are increasingly focusing on a new debt swap for Greece after that involving the private sector, or PSI, in March. The OSI plan would see a slashing of the interest rates on the bilateral laons from the country?s first bailout package that was implemented from May 2010 to end-2011.

?There are such talks,? the newspaper quoted a high-level European Union official as saying. Eurozone countries spent some 53 billion euros on the ?Greek Loan Facility.?

German state broadcaster Deutsche Welle reported that a group of eurozone member-states is strongly resisting such a haircut, at least for the time being, suggesting that this would harm the confidence that markets have in the euro area. ?At this stage it is the approval and the application of the package of 11.5 billion euros of cuts that is needed, in order to send the right message to the markets,? sources from Berlin were quoted as saying.

The German newspaper clarified that the haircut would not concern the temporary bailout mechanism, the European Financial Stability Facility (EFSF), but only bilateral agreements. In that sense, ?a Greek debt haircut from the first package would not theoretically require the approval of the German parliament.?

Even if that is the case for Germany, an OSI restructuring would be certain to generate major reactions in other eurozone countries as well as central banks.

A few days ago the governor of the European Central Bank, Mario Draghi, rushed to rule out the possibility of a new Greek bond haircut, mostly concerning the debt that the ECB holds, expressing his opposition to such an idea.

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