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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