Financial Times
November 26, 2012
It is a common opinion among investors and policy makers that the reduction in Greek private debt earlier this year was insufficient. A few months after private investors agreed to write down the value of their bonds, Athens’ debt to gross domestic product ratio is rising rapidly towards 200 per cent again.
The conclusion seems to be clear: private sector forgiveness is not enough to achieve a sustainable debt. That portion of Greek debt held by European governments and institutions such as the European Central Bank will have to be reduced too. In the jargon, OSI (official sector involvement) must follow PSI (private sector involvement).
The International Monetary Fund has taken this line but met resistance from the European Central Bank and the European Commission, its partners in the so-called troika negotiating assistance for Athens.
It should come as no surprise that the ECB and European Commission do not share the IMF’s perspective. When the IMF calls for OSI, it is in reality asking its partners in the troika to give up part of their claims, while the fund’s remains untouched, since its claim is “super-senior” in any event. The IMF would actually benefit from OSI (of the others) because the Greek government would be in a position to repay its loans earlier. And it stands to benefit from any deal, given that during the lifetime of the programme under discussion its net exposure would fall, while that of its troika partners increases.
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