The ECB starts getting helpful with Greece

By Felix Salmon
February 7, 2012
Stephen Fidler reports that the ECB is kindasorta going to tender its bonds into the Greek debt exchange, thereby helping the country achieve some €11 billion in extra savings.

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Stephen Fidler reports that the ECB is kindasorta going to tender its bonds into the Greek debt exchange, thereby helping the country achieve some €11 billion in extra savings.

The details are sketchy, but to a first approximation, it seems to work like this: the ECB has €50 billion of Greek bonds, which it bought for €39 billion. It will sell those bonds to the EFSF for €39 billion, which in turn will “return the bonds to Greece”, whatever that means. Greece, in turn, “will then agree to repay the EFSF” — which may or may not mean issuing new bonds to be held by the EFSF. Since Greece will now have €39 billion of debt rather than €50 billion, that’s an €11 billion savings.

The ECB, under this plan, ends up breaking even, without monetizing any debt. As Zero Hedge says,

The ECB could have taken the loss directly and just printed money for that loss. So this demonstrates an unwillingness to print money. The ECB could take the loss and get capital from the member states. By using the EFSF rather than new capital calls, it is a sign that countries are at the limit of what they will contribute. Hoping for new money is unrealistic – since this was the perfect opportunity to put up new money and tell the world that Europe is truly united and willing to contribute. This just uses up money that was already allocated.

I’m also a bit worried about Greece’s new €39 billion debt to the EFSF — how is that going to be structured? Right now, the €50 billion of ECB debt comprises exactly the same bonds that anybody else can buy, but a big new EFSF debt might well be some kind of senior, bilateral obligation which effectively subordinates the new bonds that Greece is going to issue in a bond exchange.

And more generally, the problem here is that the EFSF, which was created to lend new money to countries in distress, is instead being used to retire debt that Greece issued years ago. That, in turn, hurts the EFSF’s ability to fund Greece — and all the other countries in Europe, for that matter — going forwards.

So there’s not a lot to get excited about here in structural terms. In big-picture terms, however, this is clearly good news, since it’s a signal that Europe is actually finding ways to get everybody on board for a new debt deal between Greece, its bondholders, and the Troika. Will it be enough? No. But it’s a step in the right direction.

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13 comments so far

London Banker has a slightly different take on the same news: http://londonbanker.blogspot.com/2012/02  /greece-cutting-out-middle-man.html :
“The fear among the creditor states of the eurozone was that irresponsible Greek politicians might use any new money to pay civil servants and pensioners rather than bankers and hedge funds. With funds held in escrow and disbursed by a non-Greek overseer, they needn’t worry about such excesses of sovereign generosity.

This plan amounts to cutting out the middle man – the debtor. Bailout funds are used to bail out Greek creditors, without ever passing through Greek hands.”

Posted by Foppe | Report as abusive

Reminds me a lot of the ‘bad bank’ system, just much bigger and affecting more lives. Probably positive for those outside this snafu looking in, though.

Posted by ottorock | Report as abusive

So holders of the bonds will take a 70% haircut, unless the bondholder really doesn’t want to, in which case it will give the bonds to the EFSF at cost. Yes that is definitely a step forward, if our goal is a big fat Greek default, followed by Portugal a few weeks later.

Posted by johnhhaskell | Report as abusive

I agree that this move sounds like a mess, though I don’t see how Greece’s new debt to the EFSF being senior to other debt will be a meaningful change. The ECB’s bonds are being treated better than private creditors in this deal, and it’s been stated for some time that the ECB would be treated better. The bonds held by the ECB were already de facto senior to others, despite the fact that they should have the same legal status. I suspect, by the way, that this treatment of the ECB will have negative unintended consequences down the road with debt of some other sovereign.

Posted by realist50 | Report as abusive

(quote) ECB spokesperson declined to comment.

this is a wall street journal think-piece on public sector involvement, complete with fictitious ‘spokespeople’

not worth the analysis

as chancellor merkel said, they won’t force greece to leave the eurozone

but they are not going to help it stay in ….

Posted by scythe | Report as abusive

The arithmetic is simple in a perverse sort of way. Only a banker could come up with such utter nonsense and still be expected to be taken seriously.

I guess I have failed to meet expectations, once again.

Posted by breezinthru | Report as abusive

” but a big new EFSF debt might well be some kind of senior, bilateral obligation which effectively subordinates the new bonds that Greece is going to issue in a bond exchange.”
The EFSF specifically does NOT have preferred creditor status.

Posted by alea | Report as abusive

Also, it’s not a “new €39 billion debt”, it’s €39 billion instead €50 billion owed.

Posted by alea | Report as abusive

who capitalizes the EFSF? Greece is not saving 11 bn, they its costing them $14 because they would have to write them down at least 50% with a lower coupon. Europe is a mess, a political freak show.

Posted by dwb13 | Report as abusive

the efsf would just exchange the greek bonds for newly issued EFSF bonds. then the EFSF participates in the PSI taking the loss, but the loss is only realised gradually over time as it repays its bonds to the ECB. The loss is covered by future profits from its lending activities or if needed by drawing down on its guarantees.

Posted by sp333 | Report as abusive

a bailout fund (EFSF) should not expect “future profits” from lending. If European political institutions cannot grasp and embrace the concept of mark to market (and instead extend and pretend the lossees are “covered” by “future profits”), then what hope is there for the banks they regulate?

Posted by dwb3 | Report as abusive

As long as Greece has a large structural deficit and cannot tap the markets, the ECB & EFSF have leverage. Loaning the money to Greece to buy back and retire bonds at a very large discount is a painless way to reduce their overall burden. If Greece goes bust, the ECB & co are going to be bailing out the banks to a similar extent. Since in this case Greece already owes the money to the ECB, it makes perfect sense to exchange the bonds. Plus, it removes the ECB from the restructuring negotiations (which is good because they have all very strict rules about what they can and cannot do and what is needed is probably going to have to be flexible).

Posted by k9quaint | Report as abusive

(quote) Athens and the commercial banks are urging the European Central Bank to forego profits on its Greek bond holdings to help cut the debt to a sustainable level. (http://www.reuters.com/article/2012/02/ 08/us-greece-idUSTRE8120HI20120208)

thought so, the wsj article was a piece of murdoch-inspired bullsh*t
trying to prime the gun for Athens

Posted by scythe | Report as abusive
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