Searching for Greek solutions
They are trying, really trying, to get that deal done to cut the value of Greek debt - one that accepts the new realities I described in my last post.
The key is that all sides now accept that, for the numbers to add up, the public sector has to take a hit. There's a limit to the losses that the private sector debt holders will accept, and they have reached it.
But the technicalities of "public sector involvement" turn out to be almost as complicated as the private variety.
People close to the negotiations still hold out the prospect of reaching a deal early next week, but there's a lot to be ironed out yet.
By far the biggest problem with the European Central Bank directly taking a loss on the Greek bonds that it has purchased is that it would probably mean the central bank had to stop accepting Greek bonds as collateral in return for providing cash to Greek banks.
If you are a Greek bank, this is more than a "problem". It would be a catastrophe. At this point, cheap ECB liquidity is more or less the only thing keeping the Greek banking system afloat.
So, they need to find a way round the roadblock.
One option they're looking at would have the ECB sell its Greek bonds to the European rescue fund, the European Financial Stability Facility, and then the EFSF would take a "haircut" as part of the deal with private sector investors.
That way, governments ultimately take the loss, not the ECB.
Another, more ambitious proposal (but ultimately more attractive to the governments) would be for the ECB to transfer to the EFSF all of the bonds it has bought as part of its Securities Markets Programme (SMP) at the price they were purchased at.
Since the ECB bought this debt (Spanish, Italian, Irish) at well below face value, the EFSF would be looking a decent profit if it held on to them until they came up for redemption.
That profit, in turn could would help offset the losses on the Greek bonds, which would be included in the agreement. However, the EFSF would probably still be a net loser.
Neither of these plans is ideal. The work continues.
But, as I said yesterday, if European leaders want the Greeks to get their debt relief the polite way, they are almost certainly going to have to swallow something along these lines.