A catchy new phrase has been added to the Orwellian lexicon of Euro-speak: "private-sector involvement," which is code for imposing losses on Greece's private creditors.
The International Monetary Fund's most recent review of the Greek economy, in December, gives an indication of the scale of the pain that these creditors need to take. Even if almost all of Greece's private creditors agreed to write off half of what they are owed, its debt would still be about 120 percent of gross domestic product by 2020. More likely, participation in any write-off would be lower than that, leaving debt above 145 percent of GDP in 2020. That implies another debt restructuring would be needed after this one. And since Greece's economic news has been worse than expected of late, even these numbers are optimistic.
The risks of a disorderly default are mounting. Europe's earlier refusal to countenance default gave some lucky bondholders a year in which they could get repaid in full with loans granted by official creditors. The European Central Bank is now thought to be Greece's biggest bondholder.
Since official creditors are excluded from private-sector involvement, the remaining private creditors must suffer-ever greater losses. Fund managers involved in the talks say that the reduction in the net present value of the bonds may be much higher than that suggested by a 50 percent reduction in their face value: the true figure could be closer to 70 percent.
Losses of that scale don't sit well with anyone. Only 70 to 80 percent of bondholders were willing to participate in an earlier and more generous "voluntary" exchange that was agreed upon in July and later abandoned.
