Η Goldman Sachs για το PSI – ΦΡΕΣΚΟ και λαχταριστο. Και CDS έχω, λέγετε…

Πόρτα – Πόρτα

It will come as no surprise to anyone (other than Dallara and Venizelos perhaps) that all is not rosy in the Greek Public Sector Involvement (PSI) discussions. Whether it is the Kyle-Bass-Based discussions of the need for non-Troika haircuts to be 100% for any meaningful debt reduction, or

the CDS-market-based precedent that is set from chasing after a purely voluntary, non-triggering, agreement, the entire process remains mired in a reality that Greece needs much broader acceptance of this haircut (or debt reduction) than is possible given the diverse audience of bondholders (especially given the sub-25 price on most GGBs now). As Goldman points out in a note today, the current PSI structure does not encourage high participation (due to the considerable ‘voluntary’ NPV losses), leaves effective debt-relief at a measly EUR30-35bln after bank recaps etc., and as we have pointed out in the past leaves the door open for a meaningful overall reduction in risk exposure to European sovereigns should the CDS market be bypassed entirely (as the second-best protection for risk-averse investors would be an outright reduction in holdings). The GGB Basis (the package of Greek bond plus CDS protection) has been bid up notably in the last month or two suggesting that the banks (who are stuck with this GGB waste on their books) are still willing to sell them as ‘cheap’ basis packages to hedge funds. This risk transfer only exacerbates the unlikely PSI agreement completion since hedgies who are holding the basis package have no incentive to participate at all.

The Greek bond – CDS basis package price has risen notably in the last month or two as banks offload GGBs to hedge fund basis packagers. While this may help reduce risk exposure on the bank’s balance sheets, it further diversifies the ownership of Greek bonds and dilutes the likelihood of any broad agreement to a PSI at all (given basis package holders have zero incentive).

Goldman Sachs: Greek PSI: What To Watch

Large PSI participation is necessary in order for economic benefits to be meaningful.However, the current PSI structure does not encourage high participation.Downside risks could persuade investors to participate.But in the event that an involuntary solution is chosen, the way that the restructuring deal is imposed will set a number of important precedents for Euro area bonds.We discuss a non-exhaustive list of the relevant dilemmas.

Recent press reports suggest that Greek and Euro area officials may be close to an agreement with the IIF on the structure of the Private Sector Involvement (PSI) plan, which is meant to reduce the debt burden for Greece on a voluntary participation basis. The reports suggest that an agreement may be reached by next week. After the agreement is reached, the application of the PSI will commence. In today’s Daily, we discuss the risks involved in the PSI application and the key issues to watch.

Why Large-Scale PSI Pa