In the context of sovereign debt crisis, private sector involvement (PSI) refers, broadly speaking, to the contributions or efforts of

private sector The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government. Employment The ...

creditors to the crisis resolution process, and, specifically, means that the private sector shares some of the costs of a

financial crisis A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and man ...

by incurring itself financial losses.

History

The term "private sector involvement" was introduced in the late-1990s in the context of the discussions on

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...

restructurings and

capital account In macroeconomics and international finance, the capital account, also known as the capital and financial account records the net flow of investment transaction into an economy. It is one of the two primary components of the balance of payments, ...

crises. Previously, the term used to broadly denote any kind of private-sector participation into an existing government program, such as, for example,

family planning Family planning is the consideration of the number of children a person wishes to have, including the choice to have no children, and the age at which they wish to have them. Things that may play a role on family planning decisions include marita ...

,"Private Sector Involvement in Family Planning"
the Family Planning and Reproductive Health Indicators Database or health care. Since then, it has come to signify specifically the private sector's participation in the losses taken in cases of

sovereign debt A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit o ...

write downs.

Justification

The private sector involvements covers measures such as the rescheduling, reprofiling, and restructuring of the state-debt holdings of private creditors, in the context of the resolution of a sovereign debt crisis. According to the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

, the measures of the private sector involvement process are appropriate in order to "have the burden of crisis resolution shared equitably with the

tate Tate is an institution that houses, in a network of four art galleries, the United Kingdom's national collection of British art, and international modern and contemporary art. It is not a government institution, but its main sponsor is the U ...

sector," as well as to "strengthen market discipline."

Implications

ECB Executive Board member Lorenzo Bini Smaghi has warned in 2011 that the enforcement of private sector involvement in resolving a financial crisis inside the

Eurozone The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro ( €) as their primary currency and sole legal tender, and have thus fully implemented EMU polici ...

would incur "a series of problems": The taxpayers of the creditor countries would suffer in any case; patient investors, who have stuck to their investment, would be punished; the measure would destabilize the financial markets of the Eurozone by creating incentives for short-term speculative behavior; and it would delay the return of the debtor nation to the markets since market participants would be unwilling to start reinvesting in the country for a long period. This, Smaghi stated, would oblige the state sector to eventually increase its financial contribution.

Context

Although the term used to denote any kind of private-sector participation into an existing government program, such as, for example,

, or health care, it has come to signify the private sector's participation in the losses taken in cases of

write downs, and, more specifically, "any kind of...contributions of the private sector in the context of sovereign financial distress." In the view of the

, private sector involvement "in the resolution of financial crises is appropriate in order to have the burden of crisis resolution shared equitably with the official sector, strengthen market discipline, and, in the process, increase the efficiency of international capital markets and the ability of emerging market borrowers to protect themselves against volatility and contagion." The Fund claims that "a broad consensus has emerged among IMF member countries on the need to seek PSI in the resolution of crises." According to William R. Cline, “'PSI' has been the 1990s equivalent of 'bailing in the banks' in the 1980s."

Greek sovereign-debt crisis

The most prominent case of PSI occurred in the process of the sovereign-debt restructuring of

Greece Greece,, or , romanized: ', officially the Hellenic Republic, is a country in Southeast Europe. It is situated on the southern tip of the Balkans, and is located at the crossroads of Europe, Asia, and Africa. Greece shares land borders ...

, after a significant

haircut A hairstyle, hairdo, haircut or coiffure refers to the styling of hair, usually on the human scalp. Sometimes, this could also mean an editing of facial or body hair. The fashioning of hair can be considered an aspect of personal grooming ...

"Haircut: A reduction in the face value of a troubled borrower's debts
BBC
2015); a reduction of the amount that will be repaid to creditors

2015) of it was agreed, in early 2012. The so-called "world's biggest debt-restructuring deal in history""How the Greek debt puzzle was solved"
Reuters, 29 February 2012 affecting some €206bn of bonds, occurred in February 2012, when the

Eurogroup The Eurogroup is the recognised collective term for the informal meetings of the finance ministers of the eurozone—those member states of the European Union (EU) which have adopted the euro as their official currency. The group has 19 membe ...

finalized a second bailout package for Greece.Statement
by the

, 21 February 2012 EU member-states agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates, while the

would provide "a significant contribution" to that loan. Part of that deal was the agreement for private-sector involvement (PSI), whereby private investors were asked to accept to write off 53.5% of the face value of the Greek governmental bonds they're holding, the equivalent to an overall loss of around 75%. If not enough private-sector bondholders were to agree to participate in the bond swap per the PSI requirement, the Greek government threatened to retroactively introduce a

collective action clause A collective action clause (CAC) allows a supermajority of bondholders to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring. Bondholders generally opposed such cla ...

to enforce participation."Das Rettungspaket kommt, die Zweifel bleiben"
("The bailout comes, the doubts remain"), '' Süddeutsche Zeitung'', 21 February 2012, (in German) Eventually, private-sector involvement reached 83,5% of Greek bond holders. The Bank of Greece, in its 2011–12 report, commented that "the successful completion of the PSI, creates a new operating framework for the Greek economy in the years ahead." Social and other Repercussions The PSI was touted as a great success because it gave the Greek economy breathing space, but in reality, it depleted the capital of all Greek lenders, as well as the reserves of Greek pension funds, and penalized even the small private bond holders (private individuals holding less than 100k face value), whose losses were not even recognized for

tax deferral Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particular ...

(law 4046–2012 article 3, paragraph 5 only recognized losses of corporations ). At the same time, Greek sovereign bonds held by the ECB and other EU central banks as a result of the SMP Programme (and ANFAs operations) were excluded from the PSI through a secretly agreed swap agreement between ECB and the Hellenic Republic in February 2012. During the following years, Eurosystem central banks were subsequently paid back at face value, generating a substantial 18 billion euros of profits, which were partly retroceded to the Greek governments.

Legal aspects

Certain official measures executed during Greece's state debt restructuring process and the subsequent private sector involvement were not covered by existing ISDA provisions for

CDS The compact disc (CD) is a digital optical disc data storage format that was co-developed by Philips and Sony to store and play digital audio recordings. In August 1982, the first compact disc was manufactured. It was then released in Octo ...

contracts, as the

conceded. Therefore, according to the IMF, the typically expected

credit event A credit event occurs when a person or organization defaults on a significant transaction. He or she is unable to honor the terms of the contract entered, and the borrower’s ability to pay comes into question. Because the marketplace recognizes s ...

was not officially triggered, the negative contingencies to private holders of state debt were increased, while the credibility of the sovereign-

market was undermined. The measures undertaken included the "persuasion"Quotation marks in the original. of certain Greek debt-holders to accept large

haircuts A hairstyle, hairdo, haircut or coiffure refers to the styling of hair, usually on the human scalp. Sometimes, this could also mean an editing of facial or body hair. The fashioning of hair can be considered an aspect of personal grooming ...

under a supposedly “voluntary PSI" agreement. Accordingly, Greece achieved a "very high creditor participation" of 97 percent of debt held, despite the restructuring being preemptive and, as assessed by the IMF, having a "very large" target of a 70 percent

of the bonds' face value.In terms of

net present value The net present value (NPV) or net present worth (NPW) applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount ...

Notes

References

External links

*{{cite journal , last= Xafa , first= Miranda , date=January–March 2013 , url=https://www.mirandaxafa.com/mediaupload/articles/life_after_debt.pdf, title=Life after Debt : The Greek PSI and its aftermath , journal=World Economics, volume=14, issue=1 , pages=81–102 Government finances Investment Public economics