PSI stands for Private Sector Involvement, or debt purchases by private entities, and is an important part of the Greek bailout, along with LTRO and EFSF.

Q. We’ve talked about LTRO and EFSF this week, but what’s PSI?
A. Private Section Initiative. It is the third leg of the bailout stool. LTRO is the central bank’s initiative to provide liquidity. EFSF is the government to government bailout mechanism. The last part is the private sector group, and that’s what the PSI is aimed at.

Q. How do those holders break down? Who are they?
A. Two major categories. The bigger one is made up of large institutions, pension plans, insurance companies, things like that. They’re represented at the table through the Institute of International Finance, a lobby group. The second are really, really private holders, largely friends the hedge funds who are playing various strategies versus a default or bailout.

Q. Are they aligned? Will they be able to agree as a group?
A. No, they aren’t. The big boys are largely influenced by the same governments that are driving the rest of the process, and the ECB. By definition, the hedge funds are agitating for a different result: a higher payout, or even a default to cash in on their CDS positions. That group is a big wildcard in the negotiations.

Q. So, what’s the leverage to make the hedge funds play ball?
A. Weirdly, its that the bonds were mostly issued under Greek law… so Greece can, in principle, change the law. But even that takes time of course… don’t forget that we’re only one month away from a big payment most people don’t think Greece can make unless something changes. So the dynamics and brinksmanship are pretty intense right now.

Q. Well that’s interesting. What does it tell us about the other troubled sovereigns?
A. Sounds like a legal detail, but it’s a big point. With Portugal, for example, the bonds were mostly issued under UK law and cannot be changed by fiat. So there, procedurally, you’d have even more trouble getting a deal done that you’re having in Greece. Pretty hard to imagine how that happens.

Q. Back to the 3 legged stool: LTRO, EFSF, PSI. Is it all just too complicated to actually getting a deal done?
A. It might just be. So many different stakeholders, so many motivations, so many different bonds and legal rights. Many political leaders are saying essentially that a deal will happen because it has to, but basic complexity theory might doom this process.