Crucial discussions regarding the haircut

A week of tough bargaining begins today with the PSI entering its final stages, with all sides aiming to close it within the week if possible. Dalara returns to Athens on Wednesday, but negotiations between the government and bankers, led by Petros Christodoulou of PDMA, begin tomorrow.

The biggest problem in the negotiations, as to which Lucas Papademos has direct information and the ability for intervention, is the interest rate on the new bonds the creditors will receive after the haircut.

The proposal put forth by Dalara on behalf of the banks talks about a rate over 5% and up to 5.5%.

The IMF and the European countries participating in the financing program of Greece believe that this rate does not make the debt sustainable, which means that they will require additional funds. The counter proposal, expressed by German finance minister Wolfgang Schäuble, is based on a significantly lower rate, from 2% to 4%, but was rejected by the bankers, thereby discontinuing the negotiations last week.

The government has a strong card in its hands, the collective action clauses (CACs), which in the case of non-satisfactory participation will allow it to convert participation from voluntary to mandatory, provided that the participation of individuals does not exceed 75%. Their activation equals a credit event and no one can predict its consequences, apart from the exclusion from world markets which is already enforced upon Greece. The finance ministry has prepared the CACs amendment that must be voted for by the parliament in order to be included in the PSI agreement.

The negotiations that begin today are expected to be especially tough on the part of banks, because acceptance of a lower rate increases significantly the overall losses that will come after the haircut (depending on the rate, it can reach up to 70%), which in turn will increase the funds that will be needed to meet the capital adequacy
ratios.