8 February 2012 Last updated at 02:05 ET

Article written by Stephanie Flanders Economics editor

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European Central Bank bows to reality over Greek bonds

 

It seems the European Central Bank has bowed to the reality that it could not expect to make a profit on the Greek bonds it has been buying at knock-down prices, while private sector bondholders were being asked to take such a big hit.

The complicated arrangement for involving the ECB in the deal to cut the stock of Greek sovereign debt, now sketched out by the Wall Street Journal, is slightly different from the variants I discussed the other week.

However, the basic principle is the same. As I predicted, the European Financial Stability Facility is going to be the middle man in a transaction that will involve no formal loss for the ECB - and, crucially, no formal write-down of any of its holdings - but could leave the Greeks up to 11bn euros (£9.2bn; $14.6bn) better off.

For weeks, there has been a clear gap between the amount of debt relief for Greece that the private sector would "voluntarily" sign up to, and the amount needed for the IMF or anyone else to be able to say, with a straight face, that Greek sovereign debt was on a sustainable path.

This complicated climb-down by the ECB will do something to bridge that gap. But, as usual, this is only one piece of the horrendously complicated puzzle that is the Greek "bailout".

For one thing, those private sector creditors voluntarily losing a large part of their shirts still have actually to sign on the dotted line.

Greek politicians also have to come up with around 3bn euros in extra spending cuts or tax rises, to unlock the first tranche of the revamped 130bn euros international rescue package, first announced to the world by European leaders more than six months ago.

Oh yes, and after they have done all that, those same Greek politicians may have to agree, at Germany's request, to let the new money go into an account with a big EU-IMF padlock on it, marked: "Use first for paying off bondholders. Payments to Greek government itself only under advisement."

You can imagine how much Greek voters would love that. But if the government does not sign up to all this, it is difficult to see how Greece avoids a formal sovereign default in the next few weeks.

The political meeting to hammer it all out, in Athens, is now due to take place on Wednesday, but it has already been postponed twice this week.

European officials are said to be "exasperated" with all the delays. But they cannot be entirely surprised. If I were a Greek politician, faced with these options, I'd be pretty keen to put off that meeting as well.