European governments: Examining Greece escrow proposal and PSI negotiations

The suggestion by Germany and France on Monday to create an escrow account for Greek interest payments is important as it effectively allows the EU and the IMF to cut the financial tap to Greece but without necessarily forcing disruption into broader financial markets.

This said, it’s still not clear how and whether it would cover underlying principal payments, which is obviously a critical issue ahead of the €14.5bn March 20 principal payment.

Regarding the Private Sector Involvement, market participants are coming around to generally assuming Greece doesn’t have much choice but to reach an agreement with the EU/IMF/ECB Troika.

The big disagreements have been over demands for Greece to cut minimum wages by 20%, and to eliminate the two extra months’ of “Doro” holiday pay awarded each year, which understandably are not easy propositions to digest in Athens.

This said, one respected New York analyst late Monday reportedly said he expected Greece to negotiate on these issues, giving some ground on both or resisting one while accepting the other. With the takeaway that a cut to minimum wages will be more readily accepted than the cut to the Doro (cutting minimum wages should at least help spur employment especially for youth and low income earners).

Regardless, as IFR has written numerous times, the Troika and Athens reaching agreement on the PSI only represents a first step, or as Churchill said, it is, perhaps, “the end of the beginning”.

Wherein investors are reminded that Greece almost certainly won’t have enough participation in the PSI to make it successful on its own, so that Collective Action Clauses will then likely be legislated and used to try and further coerce bondholders into participation.

In other words, while agreement may be reached bringing the PSI to a conclusion, we are likely to see negotiations over the PSI quickly reopened under the coercive threat of using CACs.

The Troika and Athens reaching agreement on the PSI only represents a first step, or as Churchill said, it is, perhaps, “the end of the beginning”

Indeed, even this is not generally assumed to generate enough participation, with the actual implementation of the CACs then needed to force remaining holdouts, which then should trigger CDS.

Finally note, that a notice period will be needed between when CACs may be enforced and when a vote on participation in the CAC (as it is a “collective” action clause), in addition to whatever time the Greek legislature would need to pass the relevant legislation. Similarly, remember the IMF and Europe will also need time to review the situation and then disburse payments.

From which we can see another motivation for Germany and France to set up an escrow account for Greece, to guarantee interest payments while time is running short.

All of which places a very immediate emphasis on reaching some sort of initial agreement on the PSI, with market expectations now centring on getting this done by the end of next week at the very latest.