Eurozone Mulls Tweaks to Greek PSI to Bridge Debt Gap

Masters of the Eurozone are considering tweaks to Greek debt restructuring in terms of its private-sector involvement among several options to further cut Greek debt toward the target of 120 percent of gross domestic product in 2020, officials said.

Under the main scenario of a debt-sustainability analysis by the European Commission, the European Central Bank, and the International Monetary Fund, Greek debt will fall only to 129 percent of GDP in 2020, assuming Greece has a primary surplus next year, one official said.

Eurozone leaders agreed in October that the debt should fall to 120 percent in eight years from 160 percent now for it to be deemed sustainable.

They agreed to lend 130 billion euros to Greece to help finance the process, which also has to include private investors forgiving one-half of what Greece owes them in nominal terms.

Senior Eurozone finance officials meet on Sunday to discuss the debt-sustainability analysis and find ways to bring the debt closer to the 120 percent target ahead of a finance ministers meeting on Monday that is to approve the new financing package.

If you do a number of things, you can bring the 129 close to 120, one Eurozone official familiar with the document said. These are restructuring the accrued interest on the privately held outstanding Greek bonds, cutting the interest rate on the Eurozone bilateral loans to Greece, and restructuring the bonds held by the national central banks in the investment portfolios, the official said.

So far, negotiations with private investors holding Greek bonds focused on halving in nominal terms the principal that Athens owes them. Now, the investors may need to agree to forgo some of the interest on these bonds as well, officials said.

National central banks hold an estimated 12 billion euros of Greek bonds, and if they agree to restructure them by taking a loss like the private sector, it would cut Greek debt further.

Bilateral Eurozone loans to Greece under the first, 80 billion euro bailout from 2010 carried a punitive interest rate.

If you do all these things, the ratio comes down to close to 120 percent. And the financing needs stay very close to 130 billion euros, the official said.

If none of these measures are taken, the contribution from Eurozone governments would have to increase to 136 billion euros from 130 billion euros -- an option some governments would find difficult amid popular displeasure with bailing out Greece.

German Finance Minister Wolfgang Schaeuble mentioned the 136 billion as a possibility to German lawmakers on Feb. 10.

Smaller Bond-Swap Sweetener?

Some governments are thinking of yet another possibility -- to offer a smaller cash sweetener to investors for the bond swap that is to halve the nominal value of privately held Greek debt.

Of the 130 billion euros that Eurozone governments agreed to provide for Greece in October, as much as 30 billion euros was to be earmarked for the sweetener.

The sweetener is quite expensive, a second Eurozone official involved in the talks said. If you would end up getting it right by making the sweetener 20 or 25 billion euros instead of 30 billion -- do you really think that investors would say, 'Let's forget the whole deal'? There would be a hard default, and they would lose much more, the second official said. If we see that there is a shortfall for the Greek debt target, which is now obvious, how should we fill the gap? Should it be just the Eurozone giving more or should the burden be shared? We are in this boat together with private investors.

Officials said the idea of cutting the sweetener, pushed by the Netherlands, had its supporters and its opponents in the Eurozone, but noted it came late, after a deal has already been reached with banks on the restructuring.

Putting this again on the table reopens the whole thing, and then we have a problem because we are running out of time, the first official said. The restructuring of accrued interest can probably be done more easily, the official said.

The bond-swap deal must be completed before a March 20 redemption of 14.5 billion euros worth of Greek bonds if Greece is to avoid a default, meaning that effectively the restructuring offer has to be launched early next week.

A further contribution to lower Greek debt was likely to come from the ECB, which would forgo profits on the Greek bond portfolio it has accumulated as a result of its bond-market interventions.

The ECB is ready to forgo these profits, that if they make a profit, they can return it to the national central banks, and then it is for the national banks to decide what to do with it, the first official said. And then things become complicated, because each country has a different legislation when it comes to the transfer of profits from the national central bank to the national budget, the official said. The second problem appears once the money is in the budget, because there has to be a decision to transfer that money to Greece. That's where it becomes more complicated, he said.

Eurozone officials will seek to solve these technical issues at their meeting on Sunday. There has to be a deal, because there is no plan B, the official said.

A third Eurozone official said, Most people are of the view that undoing the voluntary PSI, very carefully negotiated between Greece and the private-sector investors, would be too risky.