It was always a forlorn hope that agreement on a ‘voluntary’ Greek debt restructuring would be completed by yesterday’s EU finance ministers’ meeting. This is no surprise to anyone who has been following the negotiations; there are essentially four sides involved in these very complex negotiations with vastly differing and competing interests, with a lot of money at stake and a rapidly deteriorating set of underlying circumstances. All parties involved in the PSI talks have agreed that discussions need to recommence as soon as possible, with a view to having a deal in place no later than February 13th. Frankly, it would be remarkable if a deal which was capable of enforcement was completed by then.
One of the principal problems is that the troika (ECB, IMF and EC) wants private sector bond-holders to accept more pain. A particular sticking point has been the coupon rate that will be offered on the new bonds issued. On behalf of private sector bond-holders, the IIF has said that the former will not accept a coupon below 4%; this coupon represents a net present value reduction on existing debt of close to 70%. However, the troika wants a lower coupon rate, apparently no more than 3.5%, because the situation in Greece has deteriorated further since the late-October agreement at the EU Summit and without a lower coupon Greece has little chance of stabilising its government debt to GDP ratio anywhere the 120% target by 2020. If the coupon rate were nearer 3%, then the net present value reduction would be closer to 73%.
Not helping the situation is the inability of the Greek government to deliver on its previous commitments. More public sector redundancies had been promised, as well as wage reductions for both public and private sector workers. Also, there is scant progress on the asset-sale program. Europe keeps saying to Greece that unless it delivers on its undertakings there will be no more money. For its part Greece is once again betting that Europe will not be brave enough to pull the pin. It is a very high-stakes game of poker. At some point soon, Europe might decide that Greece is just not worth the trouble any longer.