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.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 13.

    As the greek economy contracts further then the debt to GDP ratio gets worse even if the debt doesn't ( and in fact it is). The inevitable conclusion is that even if the numbers are yet again fudged to allow a bailout then in fact the situation will continue to deteriorate.
    Conclusion this charade is about face saving for Euroland politicians seeking re-election not about Greece or economic sense.

  • rate this

    Comment number 12.

    I am (sort of) with the Greek people on this. Default is really the only sensible option for Greece. It will be painful and probably cause total economic chaos in Greece for 5 years, lots of Greeks will emigrate but what will emerge is a better Greece both socially and economically

  • rate this

    Comment number 11.

    The technocrats runing Greece want the bailout but the people (who haven't voted for them) don't.

    Whether this bailout goes through or not, the whole Greek debt situation is unsustainable. Further bailouts will be required and the pressure on the Greek people will be huge. There will come a point soon when they will just say 'no more'.

    The wolf in the Euro is Germany - record exports for 2011.

  • rate this

    Comment number 10.

    Steph - By taking further loans the Greeks are still "putting off that meeting".

    Let them default and let each bond holder negotiate for themselves, put Greece's economy on a viable path. The sooner reality is brought in the sooner a positive way out can be found.

    Slowly strangling the country is cruel

  • rate this

    Comment number 9.

    it would appear the greeks have the germans & the french over a barrel, they will pay back a fraction of their borrowings while continuing their tax dodging & corruption willy nilly

  • rate this

    Comment number 8.

    When it comes to the crunch - and we are not there yet - it boils down to one question. Is Greek default and probable exit from the Euro more in Germany's interests than not? If latter Germany will support Greece - they can afford to and as a share of their vast financial resources it is not hugely significant. Politics will decide.

  • rate this

    Comment number 7.

    From a Greek farce to a mellowedrachmAAA
    One Trojan horse inside another and another like a series of Russian dolls all dressed up and nowhere to go

  • rate this

    Comment number 6.

    Kick the can further down the road. Let our children pick up the pieces.
    The EU is now run by the unelected for the benefit of the Germans, the UK by the Financial Services industry and the US by Wall Street. All of them want to see more money printing and as long as the stock market keeps rising all is OK. This will still get messy.

  • rate this

    Comment number 5.

    The pre-condition placed on the Greeks by the ECB, that it had to achieve debt reduction with the bondholders in a wat that didn't trigger Credit Default Swap contracts was always an impossible millstone.
    What is intetesting is that the ECB is now caught in a bind of its making, trying to profit by buying cheap Greek debt, while forcing Greece to try and negotiate with its hands practically tied.

  • rate this

    Comment number 4.

    Well a 70% haircut means either that the CDS contracts on Greek debt will be triggered or else all such pieces of paper will be torn up as worthless. I'm not sure which alternative I prefer. Actually making all such 'clever' derivatives worthless (once their volume exceeds the GDP of a major country they are, de facto, worthless) might be a good thing.

  • rate this

    Comment number 3.

    Government proposes but the Greek people disposes. What is the EZ doing to one of its members in hoisting on an unsustainable austerity that effectively disable the Greeks from paying off even the reduced debt. As put on the World Service "the medicine is poisoning the patient". Strikes me the Greeks should play poker with their negotiating position as the EZ has more to lose with a default.

  • rate this

    Comment number 2.

    'Debt is such a powerful tool, it is such a useful tool, it's much better than colonialism ever was because you can keep control without having an army, without having a whole administration' Susan George

    No chance it was always a game plan, thank goodness for that. I mean its not a though anybody ever thought it could be used like that before the event. That would be having a giraffe

  • rate this

    Comment number 1.

    "...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"

    So it's defaults all round then. Who'd a thunk it??? ;-)


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