Quite A Ways To Go To Get The PSI Deal done It Would Appear !

OSI still holds up PSI deal

by Dimitris Yannopoulos 20 Feb 2012

The role of the "official sector" (OSI) among Greece’s creditors (ECB, EU, IMF) remains a key stumbling block in the long-delayed decision on a writedown of Greek debt to be discussed later in the afternoon at a meeting of eurozone finance ministers in Brussels.   The 17 Eurogroup member countries appear to have settled all issues related to the private sector involvement (PSI) part of the deal, originally agreed at the EU summit on October 27, but remain divided about the scale and scope of their own contribution to the haircut of Greek bonds by 50 percent of their face value.   An unnamed finance ministry official was quoted as saying by Reuters that "questions remained over the transfer to Greece of profits accrued by the European Central Bank on its Greek government bond portfolio".   "There appears to be an agreement on lowering the interest rate of the initial (EU/IMF) loans to Greece as well as on the participation of Greek bonds held in the investment portfolios of (eurozone) national central banks in the debt swap plan," the official said on condition of anonymity.   ECB bond hangover   The pending matter revolves around 65bn euros worth of Greek bonds held by the Frankfurt-based European Central Bank and the national central banks linked to the ECB eurosystem.   The bonds have been purchased in the secondary market at a discount of around 20 percent. But the ECB has staunchly refused to submit them to the same haircut as the one planned for the PSI writedown on privately held Greek bonds, even though they were purchased by the central bank’s money creation power (quantitative easing). The ECB has proposed instead a complicated process of swapping its Greek bondholdings at face value with new Greek bonds financed by the EFSF eurozone bailout fund. The ECB would then transfer the 20 percent “profits” it has made on the purchase of the original bonds to its “shareholders”, namely the 17 eurozone governments.   The latter would then decide whether to transfer to Greece the ECB profits of around 15bn euros, as part of the new bailout loan of at least 130bn euros agreed in October.   Costly bailout   The problem with this cumbersome process is that it would raise the cost of financing the ECB swaps to exorbitant levels of nearly 100bn euros, allowing virtually no funds to go towards financing Greek debt servicing or budget support in the 2012-2014 period.   To make up the funding gap, the “official sector” is therefore forced to push for a deeper haircut on the PSI side of the bargain, as the finance ministry official suggested.   "The possibility of a deeper involvement of the private sector in the PSI debt swap, mainly through the management of accrued debt interest, continues to be discussed," the official was quoted as saying.   Accrued debt interest in 2012 is payable prior to the PSI bond swap and amounts to about 5.7bn euros that must also be financed by the EFSF.