PSI, Weekend Meetings in Athens, New Savings Potential?

The negotiations over the private sector involvement (PSI) in Greece are reportedly making progress. The resolution of this issue is essential for the second Greek aid package and that in turn is important to secure the next aid tranche from the first package. The tranche is needed before late March when Greece has a large (14.5 bln euro bond maturity).

The broad outlines of the agreement do not appear to have changed substantially. Private sector holders of Greek bonds will voluntarily accept a 50% haircut on notional value and including the lower coupon are looking at something on the magnitude of 60-65% on NPV terms.

There have been a number of press reports playing up the possibility that some speculative interests have bought Greek paper on ideas they will not participate. In this cat-and-mouse game, officials have responded by floating proposals of inserting collective action clauses into existing bond. The rub is that invoking collective actions clauses would seem to remove the veneer of the swap being truly voluntary.

While the PSI talks and the negotiations for the second aid package also take place next week and command attention, there is a meeting this weekend that is also noteworthy. The Germany foreign minister is going to meet the Greek PM and opposition leader (who is likely to be the next PM) and Greece's foreign minister.

It is not clear what is on the agenda, if Greek officials are looking to savings besides tax increases and wage cuts, its foreign policy is a place to look. In particular, Greece spends a greater percentage on defense spending than other euro zone members In 2010 it spent about 3.2% of GDP. Germany spent 1.4%. Spain spent 1.1% and Italy spent 1.8%. Greece's fiscal straits need to force it to bring its commitments in line with its capabilities.