Lower interest rates during recession, higher during development

The IIF representative is expected to announce even today all that was agreed upon concerning the restructuring of the local debt, after the completion of talks between the Greek premier, Lucas Papademos, and the rest of the political leaders. The remaining meetings of Charles Dallara, about to conclude later today, are said to bring forth the long-awaited and bilaterally accepted deal. 

The sensitive issue during the present negotiations is the interest rates of the new bonds which will replace the 50% haircut ones. According to certain sources, the weighted average interest rate will be around 4.20% to 4.25% and of a scalable status kicking off at 3%. Moreover, it will gradually increase based on a warranty connecting the interest value with the development rate of the economy. As a result, in the future the overburdened public sector will be more flexible regarding the payment of higher interest rates, at the same time providing certain facilities for the first years of the PSI implementation.

People in the banking sector believe that the signing of the deal at the moment will also open the way for the signing of the new bailout package deal, the greatest present abeyance. Nevertheless, they are still sceptical concerning the PSI realization. The reason is the cumulative 70% bank losses that hinder the participation of individuals on a voluntary basis. And it is the same people who also say that if the haircut is not satisfactory enough, then participation is doubtful.

Furthermore, there is the possibility of ECB’s participation in the PSI which, it has to be said, would not solve the problem because of the great concentration of hedge fund bonds in the past months. Many of them are aiming at CDS payments, expecting big gains if the cacs of the final deal are properly implemented.