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In the context of sovereign debt crisis, private sector involvement (PSI) refers, broadly speaking, to the forced contribution of private sector creditors to a financial crisis resolution process, and, specifically, to the private sector incurring outright reductions ("haircuts") on the value of its debt holdings. [1] : 6
The term "private sector involvement" was introduced in the late-1990s in the context of the discussions on bond restructurings and capital account crises. [1] : 6
Previously, the term used to broadly denote any kind of private-sector participation into an existing government program, such as, for example, family planning, [2] or health care. [3] Since then, it has come to signify specifically the private sector's participation in the losses taken in cases of sovereign debt write downs. [4] [5] [6]
The private sector involvements covers measures such as the rescheduling, re-profiling, and restructuring of the state-debt holdings of private creditors, in the context of the resolution of a sovereign debt crisis. [7] : 43 According to the International Monetary Fund, the measures of the private sector involvement process are appropriate in order to "have the burden of crisis resolution shared equitably with the [state] sector," as well as to "strengthen market discipline." [8]
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 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. [9]
Although the term used to denote any kind of private-sector participation into an existing government program, such as, for example, family planning, [2] or health care, [3] it has come to signify the private sector's participation in the losses taken in cases of sovereign debt write downs, [4] [5] [6] and, more specifically, "any kind of...contributions of the private sector in the context of sovereign financial distress." [10]
In the view of the International Monetary Fund, 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." [8] The Fund claims that "a broad consensus has emerged among IMF member countries on the need to seek PSI in the resolution of crises." [8] According to William R. Cline, “'PSI' has been the 1990s equivalent of 'bailing in the banks' in the 1980s." [4]
The most prominent case of PSI occurred in the process of the sovereign-debt restructuring of Greece, after a significant haircut [note 1] of it was agreed, in early 2012. The so-called "world's biggest debt-restructuring deal in history" [11] [12] : 1 affecting some €206bn of bonds, occurred in February 2012, when the Eurogroup finalized a second bailout package for Greece. [13]
EU member-states agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates, while the International Monetary Fund would provide "a significant contribution" to that loan. [13] 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%. [13]
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 to enforce participation. [14] Eventually, private-sector involvement reached 83,5% of Greek bond holders. [15] 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." [16]
The PSI was proclaimed a "great success", justified as providing the Greek economy with breathing space, although it hit the value of Greek holders of debt paper, [17] as well as the reserves of Greek pension funds, [18] most severely penalizing small private bond holders (i.e. private individuals holding less than 100k face value), whose losses were not even recognized for a tax deferral. (The law 4046/2012, article 3, paragraph 5, only recognized losses of corporations for tax write-offs). [19]
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 step through a secretly agreed swap agreement between ECB and the Hellenic Republic in February 2012. [20] During the following years, Eurosystem central banks were subsequently paid back at face value, [21] generating a substantial 18 billion euros of profits, which were partly retroceded to the Greek government. [22]
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 contracts, as the International Monetary Fund conceded. [12] : 33
Therefore, according to the IMF, the typically expected credit event was not officially triggered, the negative contingencies to private holders of state debt were increased, while the credibility of the sovereign-CDS market was undermined. The measures undertaken included the "persuasion" [note 2] [12] : 33 of certain Greek debt-holders to accept large haircuts under a supposedly “voluntary PSI" agreement. [note 2] [12] : 33 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 haircut of the bonds' face value. [note 3] [12] : 27
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 190 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of last resort to national governments, and a leading supporter of exchange-rate stability. Its stated mission is "working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world." Established on December 27, 1945 at the Bretton Woods Conference, primarily according to the ideas of Harry Dexter White and John Maynard Keynes, it started with 29 member countries and the goal of reconstructing the international monetary system after World War II. It now plays a central role in the management of balance of payments difficulties and international financial crises. Through a quota system, countries contribute funds to a pool from which countries can borrow if they experience balance of payments problems. As of 2016, the fund had SDR 477 billion.
In finance, a haircut is the difference between the current market value of an asset and the value ascribed to that asset for purposes of calculating regulatory capital or loan collateral. The amount of the haircut reflects the perceived risk of the asset falling in value in an immediate cash sale or liquidation. The larger the risk or volatility of the asset price, the larger the haircut.
A country's gross government 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 occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt.
Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the late 1980s. The bonds were named after U.S. Treasury Secretary Nicholas Brady, who proposed a novel debt-reduction agreement for developing countries.
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full when due. Cessation of due payments may either be accompanied by that government's formal declaration that it will not pay its debts (repudiation), or it may be unannounced. A credit rating agency will take into account in its gradings capital, interest, extraneous and procedural defaults, and failures to abide by the terms of bonds or other debt instruments.
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, was a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).
Greece faced a sovereign debt crisis in the aftermath of the financial crisis of 2007–2008. Widely known in the country as The Crisis, it reached the populace as a series of sudden reforms and austerity measures that led to impoverishment and loss of income and property, as well as a small-scale humanitarian crisis. In all, the Greek economy suffered the longest recession of any advanced mixed economy to date. As a result, the Greek political system has been upended, social exclusion increased, and hundreds of thousands of well-educated Greeks have left the country.
From late 2009, fears of a sovereign debt crisis in some European states developed, with the situation becoming particularly tense in early 2010. Greece was most acutely affected, but fellow Eurozone members Cyprus, Ireland, Italy, Portugal, and Spain were also significantly affected. In the EU, especially in countries where sovereign debt has increased sharply due to bank bailouts, a crisis of confidence has emerged with the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members, most importantly Germany.
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International lender of last resort (ILLR) is a facility prepared to act when no other lender is capable or willing to lend in sufficient volume to provide or guarantee liquidity in order to avert a sovereign debt crisis or a systemic crisis. No effective international lender of last resort currently exists.
Debt crisis is a situation in which a government loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, the government may enter into a debt crisis. Various forms of governments finance their expenditures primarily by raising money through taxation. When tax revenues are insufficient, the government can make up the difference by issuing debt.
The 2012–2013 Cypriot financial crisis was an economic crisis in the Republic of Cyprus that involved the exposure of Cypriot banks to overleveraged local property companies, the Greek government-debt crisis, the downgrading of the Cypriot government's bond credit rating to junk status by international credit rating agencies, the consequential inability to refund its state expenses from the international markets and the reluctance of the government to restructure the troubled Cypriot financial sector.
The eurozone crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to repay or re-finance their government debt without the assistance of third parties.
The Second Economic Adjustment Programme for Greece, usually referred to as the second bailout package or the second memorandum, is a memorandum of understanding on financial assistance to the Hellenic Republic in order to cope with the Greek government-debt crisis.
This article details the fourteen austerity packages passed by the Government of Greece between 2010 and 2017. These austerity measures were a result of the Greek government-debt crisis and other economic factors. All of the legislation listed remains in force.
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In 2009–2010, due to substantial public and private sector debt, and "the intimate sovereign-bank linkages" the eurozone crisis impacted periphery countries. This resulted in significant financial sector instability in Europe; banks' solvency risks grew, which had direct implications for their funding liquidity. The European central bank (ECB), as the monetary union's central bank, responded to the sovereign debt crisis with a series of conventional and unconventional measures, including a decrease in the key policy interest rate, and three-year long-term refinancing operation (LTRO) liquidity injections in December 2011 and February 2012, and the announcement of the outright monetary transactions (OMT) program in the summer of 2012. The ECB acted as a de facto lender-of-last-resort (LOLR) to the euro area banking system, providing banks with cash flow in exchange for collateral, as well as a buyer of last resort (BOLR), purchasing eurozone sovereign bonds. However, the ECB's policies have been criticised for their economic repercussions as well as its political agenda.
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