A Voluntary Greek Debt Deal?

by Matina Stevis

Wall Street Journal
December 30, 2011

Many analysts have been pessimistic about the likely success of efforts to lower Greece’s debt burden by restructuring its government bonds.

But a new paper by financial-law academic Mitu Gulati and Jeromin Zettelmeyer of the European Bank for Reconstruction and Development, published today, puts a, sort of, positive spin on the gloom over Greek “private sector involvement” or PSI.

Messrs. Gulati and Zettelmeyer build an elegant model that calculates what it will take for private creditors to participate voluntarily in the Greek restructuring deal and therefore make PSI a success.

The two conclude that success is within reach if creditors perceive a 50% or higher probability that Greece will be forced into or opt for another debt restructuring in the medium-run. That second restructuring would probably not be voluntary.

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