Private sector involvement

In the context of sovereign debt crisis, private sector involvement (PSI) refers, broadly speaking, to the contributions or efforts of private sector creditors to the crisis resolution process, and, specifically, means that the private sector shares some of the costs of a financial crisis by incurring itself financial losses.[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, reprofiling, 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,[10] or health care,[11] 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.”[12]

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]

Greek sovereign-debt crisis

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”[13][14]:1 affecting some €206bn of bonds, occurred in February 2012, when the Eurogroup finalized a second bailout package for Greece.[15]

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.[15] 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%.[15]

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.[16] Eventually, private-sector involvement reached 83,5% of Greek bond holders.[17] 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.”[18]

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,[19] as well as the reserves of Greek pension funds,[20] 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 (law 4046/2012 article 3, paragraph 5 only recognized losses of corporations [21]). 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 on February 2012.[22] During the following years, Eurosystem central banks were subsequently paid back at face value,[23] generating a substantial 18 billion euros of profits, which were partly retroceded to the Greek governments.[24]

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 contracts, as the International Monetary Fund conceded.[14]: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][14]:33 of certain Greek debt-holders to accept large haircuts under a supposedly “voluntary PSI” agreement.[note 2][14]: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][14]:27

See also

  • Bailout
  • European sovereign-debt crisis: List of acronyms


  1. ^ “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 (CNBC, 2015)
  2. Jump up to:a b Quotation marks in the original.
  3. ^ In terms of net present value.


  1. Jump up to:a b “Managing Financial Crises in Emerging Market-Economies: Experience with the Involvement of Private Sector Creditors”(PDF)Occasional Paper Series. ECB (32). July 2005. Retrieved 30 June 2018.
  2. ^ “Private Sector Involvement in Family Planning”, the Family Planning and Reproductive Health Indicators Database
  3. ^ Kirkpatrick, Ian; McCabe, Christopher (12 April 2011). “The NHS braces itself for privatisation”. The Guardian. Retrieved 17 June2018.
  4. Jump up to:a b c Cline, William R. (November 2002). “Private Sector Involvement in Financial Crisis Resolution: Definition, Measurement, and Implementation” (PDF)Working Papers. Center for Global Development (18). Retrieved 17 June 2018.
  5. Jump up to:a b “Portugal : Ex Post Evaluation of Exceptional Access Under the 2011 Extended Arrangement”. Country Report No. 16/302. International Monetary Fund. September 2016. Retrieved 17 June2018.
  6. Jump up to:a b Pelagidis, Theodore (30 November 2017). “To swap or not to swap? Greece issues 5 new bonds”. Brookings Institution. Retrieved 17 June 2018.
  7. ^ “Private sector involvement and its financial stability implications” (PDF)Monthly Bulletin. ECB: 43–49. October 2011. Retrieved 30 June 2018.
  8. Jump up to:a b c “The IMF and the Private Sector”. International Monetary Fund. August 2001. Retrieved 17 June 2018.
  9. ^ Bini Smaghi, Lorenzo (6 June 2011). “Private sector involvement: From (good) theory to (bad) practice”. Speech at the Reinventing Bretton Woods Committee. ECB. Retrieved June 30, 2018.
  10. ^ “Private Sector Involvement in Family Planning”, the Family Planning and Reproductive Health Indicators Database
  11. ^ Kirkpatrick, Ian; McCabe, Christopher (12 April 2011). “The NHS braces itself for privatisation”. The Guardian. Retrieved 17 June2018.
  12. ^ Enderlein, Henrik; Müller, Laura; Trebesch, Christoph (8 September 2006). “Making Sense of PSI : On the role of the private sector in sovereign debt crises” (PDF). Berlin: Hertie School of Governance.
  13. ^ “How the Greek debt puzzle was solved”, Reuters, 29 February 2012
  14. Jump up to:a b c d e Liu, Yan; Bergthaler, Wolfgang; Giddings, Andrew; Kosonen, Amanda; Papaioannou, Michael; Grigorian, David; Guscina, Anastasia; Presciuttini, Gabriel; Tsuda, Takahiro; Baqir, Reza (26 April 2013). “Sovereign Debt Restructuring: Recent Developments and Implications” (PDF)Policy Papers. IMF. Retrieved 30 June 2018.
  15. Jump up to:a b c Statement by the Eurogroup, 21 February 2012
  16. ^ “Das Rettungspaket kommt, die Zweifel bleiben” (“The bailout comes, the doubts remain”), Süddeutsche Zeitung, 21 February 2012, (in German)
  17. ^ Statement by Charles Dallara and Jean Lemierre, Co-Chairs, Steering Committee of the Private Creditor-Investor Committee for Greece, Institute of International Finance, 9 March 2012
  18. ^ “The Bank of Greece Report on Monetary Policy 2011-2012”, Bank of Greece, 19 March 2012
  19. ^
  20. ^
  21. ^
  22. ^ “ECB Wins Ruling to Deny Access to Secret Greek Swap Files”. 2012-11-29. Retrieved 2020-12-28.
  23. ^
  24. ^ Jourdan, Stanislas (2018-07-25). “How Greece lost billions out of an obscure ECB programme”. Positive Money Europe. Retrieved 2020-12-28.