FRANKFURT (MNI) – Comments Tuesday from European Central Bank
Executive Board member Benoit Coeure, along with the real risk of a
non-voluntary Greek debt restructuring, reaffirm expectations that the
central bank will forego the profits on its Greek government bond
investments to contribute to the debt reduction effort for Athens.

Last Thursday ECB President Mario Draghi had hinted that while the
bank could not take losses on its sovereign investments – which would
constitute monetization of debt and thus be prohibited under EU statute
– it could forego some of the profits on those bonds.

In a press conference that preceded last week’s Eurogroup meeting
by a few hours, Draghi would not reveal more details and said no
decision had been taken. Coeure’s comments, however, suggest that the
ECB indeed stands ready to help Greece reduce its debt load.

In an interview with the French daily Liberation, Coeure noted that
the ECB’s Greek bonds had been acquired at prices below face value. “If
there is a profit, like all monetary revenue, it would qualify for
distribution to member states, which could use it to contribute to the
sustainability of Greek debt,” he said.

The ECB holds Greek bonds with an estimated nominal value of E55
billion, which it bought at discounts of between 25 and 30%. Were the
central bank to sell those bonds at the same price it paid for them, it
could channel around E15 billion back to Athens in the form of debt
savings.

A contribution from the ECB has become more pressing because the
International Monetary Fund and Eurozone leaders are not convinced that
the Greek program as currently structured can achieve Athens’ EU-imposed
target of a 120% debt-to-GDP ratio by 2020 without any additional debt
relief. The ECB is the largest single holder of Greek government bonds.

The chances of an ECB contribution to a bailout deal also rise with
the risk that the private sector haircut on outstanding Greek bonds will
end up being forced rather than voluntary. Germany’s daily Handelsblatt,
citing unnamed central banking sources, reported Tuesday that central
bankers consider a voluntary deal increasingly unlikely.

An ECB demand for full debt repayment in the face of a coercive
restructuring could have dire side-effects for the Eurozone, since it
would turn the ECB into a de factor senior creditor and the SMP into a
double-edged sword: The more Italian or Spanish debt held by the ECB,
the bigger the risk for private sector investments in those bonds.

The ECB has argued that because it bought its Greek bonds for
monetary policy purposes and not as an investment, its holdings should
be treated differently than the bonds held by private investors.
However, this is only true for bonds bought under the SMP and not those
held by national central banks in their investment portfolios.

In addition to problems associated with assuming senior creditor
status, an inflexible ECB could raise the chances of institutional
investors such as hedge funds suing against any preferential treatment
for the central bank.

The exact form an ECB contribution to Greek debt relief might take
remains unclear. One option could see the ECB transferring profits from
Greek government investments before they materialize to national central
banks. The national banks would then pass them on to governments which
would channel them into a fund established specifically for Greece.

The attraction of this option is that the ECB would deviate least
from it’s regular procedures of handing out profits to its members
according to a specific capital key, although usually the central bank
only distributes such profits once they have been attained.

On the other hand, this option may be hard to sell to taxpayers.
After having received profits, governments would give additional cash to
Greece, which some member states have already excluded. The ECB could
also simply agree to swap its bonds with the Greek government at the
purchase value for secured bonds of the same maturity.

Another frequently cited option is for the ECB to sell its bonds to
the European bailout fund EFSF at break-even or at a small profit.
Greece would then repay the EFSF the discounted price that the bailout
fund paid for the bonds. The downside of this approach is that it would
reduce the firepower of the bailout fund, and both the ECB and the IMF
have called for a fund that should be as powerful as possible.

Projecting which structure the ECB might eventually opt for appears
little more than guesswork at the moment, but it seems increasingly
clear that the central bank will make another u-turn and contribute to
Greece’s debt relief.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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