FRANKFURT (MNI) – The European Central Bank’s decision to protect
its Greek bond holdings against potential losses from any coercive
restructuring may ultimately prove to be good news for Greece, but it
could make life more difficult for other Eurozone states under market
scrutiny.
The move also highlights rising concerns that the voluntary private
sector restructuring deal for Greece may turn into a forced exercise
with Athens retroactively imposing collective action clauses that
require bond holders to take losses.
According to various media reports, the ECB over the weekend will
exchange some E50 billion of Greek bonds it bought under the Securities
and Markets Program (SMP) for new Greek bonds that will be exempt from
any legal action Greece might take to impose losses should a voluntary
deal prove unobtainable or insufficient.
The ECB has recently signalled that it would be ready to contribute
to Greek debt relief by forgoing profits on its Greek bond purchases but
has insisted that it cannot take losses, since that would constitute
monetary financing and would thus be a violation of the Maastricht
treaty.
Ensuring that no such monetary financing occurs was seen as a key
condition to move ahead with ECB support for a second Greek bailout
deal. The bond swap might thus clear the path for the central bank to
forgo profits on Greece that could relief the country of around E10-E15
billion.
The ECB bought its Greek bonds at heavily discounted prices of
between 25% and 30% below their face value. The central bank will thus
realize profits once the bonds mature. ECB President Mario Draghi
signalled that the ECB could distribute those profits to Euro Area
member countries who could then pass them on to Greece.
However, the ECB’s decision to swap Greek bonds against new ones
that will be protected against collective action clauses also highlights
the central bank’s concern that the private sector haircut on
outstanding Greek bonds will end up being forced rather than voluntary.
In this context it is important to note that in the first instance,
the ECB is merely protecting itself against forced losses it might
otherwise face as a result of a Greek default. The transfer of profits
from Greek bond investments would only come at a later stage.
Whether those profits, once transferred, will eventually end up in
Greece still hinges on political decisions by national governments —
many of which are growing increasingly impatient with Greece and appear
to be toying more seriously with the idea of letting the country default
rather than throwing good money after bad.
ECB policy-makers have long warned that any Greek debt
restructuring should be voluntary to avoid a credit event and possible
market tensions that could ensue. A forced debt restructuring in
conjunction with a withdrawal of official aid clearly could be even more
devastating.
By paving the way to contribute to Greek debt relief, the ECB’s
decision to protect itself from Greek losses may have reduced the risk
of a hard default happening. At the same time, however, it may have
significantly weakened a key tool for countering the fallout should one
occur.
The move clearly establishes the ECB as a senior creditor, at least
for the bonds it has purchased under the SMP. This could turn 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 SMP may thus no longer serve as a tool to jump-start the market, but
may have to replace it to a large extent.
True, the ECB has wound down the SMP program significantly in
recent weeks. Not only have easing market tension made interventions
less pressing, but Draghi is also said to be sceptical of the
effectiveness of the program introduced under his predecessor
Jean-Claude Trichet.
Still, the ECB’s Greek bond swap is a gamble: it raises the chance
that a default can be avoided and the recent positive momentum can be
maintained. Should the deal fail, however, the ECB could one of its few
tools, however blunt it may be, to counter tensions in sovereign bond
markets.
–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com
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