No sooner have the supposedly close (and yet so far away) Greek debt negotiations increased haircuts but added desperate incentives such as GDP Warrants, then The Guardian is reporting that Greek PM Papademos is calling crisis meetings with Greek political party leaders as tensions are clearly growing between Greeks and their EU overlords/partners. The 'increasingly intransigent' negotiating team sent by Brussels is demanding even more severe austerity measures before sanctioning the new bailout funds. The incredulity at the complete mis-communication and increasing bifurcation is nowhere more clear than the divergence between FinMin Venizelos saying "We are one step [away]. I would say it is a formality away from finalizing (the debt relief agreement)," and the disbelief by Greek MPs that "The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."
Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country's mounting debts appeared to stall.
Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.
"We understand how difficult it is for MPs who are now faced with the hard option of voting through another round of austerity measures but the stakes are very high and one of our greatest concerns is that they don't understand just how high they are."
However, finance minister Evangelos Venizelos put on a brave face publicly and said that he believed an agreement on the debt swap was close. "We are one step [away]. I would say it is a formality away from finalizing (the debt relief agreement)," Venizelos told a news conference...
"The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."
The deadlock in Athens followed poor unemployment data for the eurozone that revealed a widening split between the continent's rich north and indebted south.
For more on GDP warrants and their lack of market acceptance (and concerns), there is an interesting article here on GDP-index bonds (albeit perhaps a little naive in its trust of government statistics) and here on valuation of GDP warrants - not that it matters as these incentivization schemes are simply bound to fail given the dispersion of bondholders and everything we have said before.
The literature has claimed that GDP-Linked-Warrants (GLWs) would provide opportunities to share growth risks between the issuer and the holder; however, the literature has also suggested that there might be moral hazard issues in the context of debt overhang, where the issuer country may lose incentives for promoting growth policies.
Despite these moral hazard problems, some have argued that, under asymmetric information, debt payments should be linked to the issuer’s GDP in order to facilitate debt-service relief. Experience has shown that the poor design and low quality of statistics have been major problems in the history of GLWs.
GDP Warrants and GDP-Index Bonds - Investors’ concerns
In this section, we discuss potential obstacles (real and perceived) to a wider introduction of GDP-indexed bonds and examine these obstacles and the ways in which they could be overcome.
To understand the main obstacles, we rely on the existing literature,13 on interviews with investors and other market actors,14 and on discussions in the expert group meeting held at the United Nations in October 2005 (United Nations, 2005a).
The three main concerns identified were:
- Uncertainty about potential misreporting of GDP data.
- Uncertainty about sufficient liquidity of GDP-linked bonds.
- Concerns regarding the difficulties in pricing GDP-linked bonds.
The main issue in this case would be the first - Accurate reporting of GDP growth data
Not only is this a relatively important concern for market participants and investors, it is also one which international institutions and national Governments can do much to overcome. The concern can be decomposed into (a) inaccuracies in measurement of relevant variables, such as nominal GDP and the GDP deflator; and (b) deliberate tampering by debtor country authorities with a view to lowering debt servicing.