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This section is classified as non-objective research• What will be the form of the EUR 30bncontribution from EU member states? Back on 21July, the collateral was expected to be 30y EFSFzero coupon bonds for the first 3 options and 15yamortising EFSF floating rate bonds for option 4(the official announcement did not specify whichkind of AAA bonds would be used but there wasa wide consensus in the market about EFSFbeing the issuer of these defeasance assets).There have been various market rumours thatthis new deeper PSI might involve cashpayments to GGB holders instead of AAA bonds.However, paragraph 14 in the EU Summitstatement says that “credit enhancements will beprovided to underpin the quality of collateral soas to allow its continued use for access toEurosystem liquidity by Greek banks”. On top ofthat, there was a statement by Hung Tran, theIIF’s deputy managing director, that thisEUR 30bn of official funding will be used tocollateralise the new bonds with AAA rated zerocoupon bond securities. Of course, we are stillmissing all the pricing details with respect tothese AAA bonds, i.e. maturity, coupon, yield.• What are the characteristics of the new PSIbonds? Back on 21 July, there were 4 optionswith different characteristics among them. Theconsensus now is that there is going to be only 1option. For all NPV considerations we need toknow the maturity profile, coupon and discountrate of these new PSI bonds.What makes senseAfter having noted what we know and what we don’tknow, we can start thinking of various scenarios thatmake sense to us given the numbers that we doactually know. First of all, it is very interesting that theEU members’ contribution to the PSI is now specifiedin EUR and not in NPV terms. The limit of EUR 30bnis a signal that the EU authorities learned the lessonof the 21 July deal where collateral turned out to bemuch more expensive than initially thought. Backthen, it was agreed that AAA bonds would guaranteethe notional repayment of the new Greek PSI bonds.In the meantime, AAA rates fall massively and theAAA collateral became much more expensive.A scenario of 90% participation over a PSI pool ofEUR 206bn, leads to a figure of EUR 185.4bn. Whenapplying a 50% haircut on this amount we end upwith a new notional of Greek PSI bonds ofEUR 92.7bn. The EUR 30bn collateral is 32.4% ofthe EUR 92.7bn of notional of the new PSI bondswhich is almost identical to the price of the 30y AAAzero coupon bonds that was used on the 21 Julydeal. In simple terms, you can spend EUR 30bntoday to buy such an amount of 30y AAA zerocoupon bonds that will guarantee the repayment ofthe new notional of the EUR 92.7bn PSI bonds after30 years.Of course, as explained before, this is based on aseries of assumptions and can only be used as amathematical calculation that makes sense with thefigures that we do know from the EU Summitstatement.Under the alternative scenario where the 30bn iscash and not AAA bonds, the investors will end upwith a new PSI bond which will carry only Greek risk.Thus it will have a lower NPV compared to theprevious case where the notional is guaranteed byAAA bonds. This shortfall in NPV terms will becompensated for with cash delivery at the time of theexchange. In the case where the notional repaymentis not guaranteed by the AAA bonds but will have tobe paid by Greece, there is a possibility of using anamortising bond in order to smooth out theredemption profile and avoid a 30y bullet bond whichwould create a huge spike in the redemption profileof Greece. This would have NPV implications toosince the cash flows will change substantially.NPV considerationsIn this last section we try to get a feeling of where theNPV of this new PSI package will stand. As notedabove, this can only be done under a combination ofassumptions. Here we examine both the 30y AAAzero coupon bonds (worth EUR 30bn) scenario andthe EUR 30bn cash scenario that were describedabove. We use a combination of coupon of 4.5% and6% and discount rate of 9% and 12%. Tables 1 and 2show the results of these NPV estimates.Starting with Table 1, the notional of the new 30y PSIbonds is guaranteed by AAA zero coupon bonds(which are priced at 32.4% NPV). The NPV of thePSI deal (as a percentage of the original GGBsnotional) in this case varies from 34.3% in the lowcoupon/high discount rate case to 47% in the highcoupon/low discount rate case. Table 2 shows theresults under a no AAA collateral scenario, whereinvestors are given EUR 30bn of cash, or(30bn/185.4bn) 16.2% NPV under a 90%participation scenario. Bear in mind that this NPVpercentage will vary according to the participationand the PSI eligible pool of GGBs since the onlyconstant is the EUR 30bn figure. The NPV of thisoption ranges from 36% to 50.8%.The reason that the NPV is a bit higher in this case isbecause investors will receive the principalredemption in 30y by Greece and still receive 16.2%of NPV in cash while in the AAA bonds caseinvestors receive only a coupon stream by Greeceand the AAA bonds which are worth 16.2% of NPV,i.e. there is no principal repayment by Greece (in linewith original PSI terms). The principal redemption willtake place via the AAA bonds in this case.Ioannis Sokos 27 October 2011Market Mover37www.GlobalMarkets.bnpparibas.com