Because so much has been heard and written about the PSI which not only affects us psychologically but our investment decisions as well, i.e. the equity markets, it seems important at this time, to come to a final conclusion concerning this matter.

 By Grigoris Nikolopoulos

The matter has three components:

a)    The ‘banking sector bondholders’, i.e. foreign and Greek banks which possess Greek bonds.

b)   The ‘partner lenders’, i.e. European leaders and the IMF.

c)    The Greek government.

The requirements

The partner lenders and the Greek government request banking sector bondholders to agree to the cut under certain conditions. In other words, they are proposing to replace maturing bonds with a certain amount in cash as well as other long term bonds of a lesser value (as guaranteed by British law). What this means is that the banking sector bondholders will lose but Greek debt will decrease. If they do not agree, they face a greater risk of the bonds defaulting as Greece cannot pay on the maturing bonds. This in turn would lead to a disorderly bankruptcy with disastrous consequences for everyone. This is the consensual PSI haircut so to speak.

The ‘Package’

In principle, banking sector bondholders accept the PSI on the condition however that in order ‘to agree on the details, we need to have reassurances that Greece will find both the cash that they promised to give us as well as the ability to pay for the new bonds and the interest on them.’

These reassurances must come from the lender partners, i.e. the EU and the IMF.

Therefore the banking sector bondholders are requesting that the partners sign the loan agreement for 130 billion euro to Greece as agreed in principle in October (which includes the 89 billion euro as well as all the funds needed to finance the Greek banks).

The partner lenders understand this request, but state that in order for them to sign the 130 billion euro funding package, the Greek government must first sign the reform pertaining to the requested economic measures for the Greek economy. And it doesn’t end there. Not only the current Greek government, but all the Greek parties must support the Greek parliament as a whole. This includes all the measures for reducing the deficit such as cutting salaries and pensions, closing down state enterprises and public services, reducing the welfare state, opening up markets and professions and reducing the waste of funds.

Therefore the PSI is part of a ‘package’ of agreements which will include commitments both from the Greeks as well as those of the Europeans and those financing the Greeks.

Whatever the case may be, the signing of the entire package, including the PSI, will be a process with its fair share of ups and downs. Therefore, those investing in the hope of the PSI being signed swiftly should be very careful.

The information that reporter.gr has regarding all of this, is that there will be certain announcements regarding the PSI agreement this week (under certain conditions of course). This will be followed by announcements after the Summit Meeting where the hopes of all the participants in the discussions, will be that everything will be agreed upon in February. This is naturally so that we do not reach March and have to pay on the 15 billion bond which expires then.

As anyone can understand, the issue at hand is complex especially when one takes the lenders as well as the Greek political parties into consideration.

Many of the countries which will lend us funds must gain approval from their parliaments.

In addition, the Greek parties (PASOK, New Democracy and LAOS) must sign the economic plan. As to whether they sign, depends on whether they view the situation as critical or not and whether their signing the agreement is within their political plan.

In short, we see everything repeat itself: If Antonis Samaras (leader of the New Democracy party) doesn’t sign, we will not see any haircut. And up to now, he has been insistent that we should go to elections so signing the agreement doesn’t seem to be part of his political agenda. Having said that, it does seem that he has finally grasped the gravity of the situation and is in fact, being pressured to help with the situation.

Therefore, despite screaming to the contrary, he probably will agree. Butyouneverknow…..

Regarding the issue concerning capitalizing the banks which primarily affects the stock prices, investors should take the following into account:

The government which will receive the money must ensure that it will receive the funds back through COMMON shares. Meanwhile, it must be ensured that there will be no governmental intervention with the banks’ management or functioning. The capitalization therefore needs to reach two objectives. Information points to how the capitalization will take place with common and non-voting convertible shares.

As to how this will affect today’s banking sector stock prices, each and every investor needs to take this into account.