Wall Street Journal
October 26, 2011
As we reported this morning, representatives of the Institute for International Finance put forward a new proposal to euro-zone governments last night in an effort to break the deadlock over Greece’s debt deal ahead of today’s European summit.
We couldn’t immediately learn the details, except for one snippet: The new proposal suggests a different discount rate being used to calculate the headline figure for the private sector contribution for the debt exchange.
So what? To explain, let’s back up a bit to the July 21 agreement by euro-zone leaders on a bond exchange that would reduce the net present value* of Greece’s debt by 21%–using an annual discount rate of 9%.
Since then, circumstances have changed. Germany has been seeking a 60% reduction. The International Monetary Fund has been arguing that even more is required to put Greece’s debt on a sustainable footing, a position which implies a forced debt restructuring.
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