January 11, 2012
Ugly acronyms in Europe often hide ugly ideas. The EFSF, short for European Financial Stability Facility, for instance, has not lived up to its billing of offering financial stability.
Now it is time for another acronym to have its time in the sun again: PSI is back in the headlines. Private sector involvement is the rather clunky name for the method of making banks, insurers and other investors take losses on their holdings of Greek government bonds.
Not for the first time, a PSI deal in Greece is imminent. Bondholders are braced for a net present value loss of about 60 per cent, although finer details are still being debated, and in the worst case could be held up again.
The saga is so lengthy – discussion of PSI in October 2010 arguably sparked the most serious bout of contagion in the two-year long crisis – that investors might be minded to dismiss the deal as almost irrelevant with the true action to be found in Italy or Spain. But the reality is that the Greek PSI deal is seeing many of the big issues regarding Europe’s future played out in Athens.
How these issues are settled, and in whose favour, could help set the direction for markets and the single currency for some time.