Make them pay

6 January 2012 By Neil Unmack Follow @unmack1

Athanasios Orphanides, an ECB governing council member, says the euro zone should drop plans to impose losses on Greece’s private creditors. That might calm markets, but it wouldn’t solve the problem. It could also strain relations within the euro zone, storing up another crisis.

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Athanasios Orphanides, governor of the Bank of Cyprus and a member of the European Central Bank’s governing council, argued in an article in the Financial Times that the euro zone should abandon plans to force losses on Greek creditors, the so-called private sector involvement (PSI). Orphanides suggested that a “30-year low interest-rate loan” could reduce Greece’s interest burden in lieu of the PSI.
“Reversing the Greek PSI decision would help to restore trust,” in the debt of other euro zone governments, Orphanides wrote in the Financial Time on Jan. 6.
“Consistent with IMF principles, one of the reasons for imposing the Greek PSI was to reduce the interest burden on the Greek government. But a serious limitation of their application in the euro zone is that the IMF principles examine a member state in isolation, ignoring contagion effects on other states. Reversing the Greek PSI decision would also raise the financing cost on the Greek government, but by restoring trust in the euro zone it would reduce the financing cost of other euro zone governments. Reversing the Greek PSI would benefit the euro zone as a whole.”
Greece needs to secure agreement with bondholders for a 50 percent haircut on 200 billion euros of private debt as part of its second bailout.

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