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The least bad option

8 February 2012 By Neil Unmack

Another piece in the puzzle that is the Greek second bailout may be slotting into place. The European Central Bank has reportedly agreed not to demand repayment on its Greek bonds at face value. That makes sense.

If the Wall Street Journal’s report is accurate, the ECB has chosen the least bad option. Its purchases of Greek bonds, probably in the range of 40-50 billion euros, could have become a sticking point in negotiations over the country’s second bailout. According to the Journal, the ECB will swap them – at below face value – for bonds issued by the European Financial Stability Facility, the euro zone bailout fund. The move could save Greece up to 11 billion euros – the difference between the price the ECB paid for the bonds and face value.

Purists can argue that a surrender of profits constitutes monetary financing – something the central bank is not allowed to do. But in practice, such a move would address three pressing problems.

First, it would assuage the indignation of bondholders that the ECB stood to profit from its Greek debt even as private creditors – with equal contractual rights – were coerced into taking up to a 70 percent loss in value. A concession from the ECB would mean that its bond-buying programme does not necessarily subordinate private creditors.

Second, it would reduce Greek debt by as much as 5 percent of GDP. Realistically, that’s not enough to matter, but it might help euro zone politicians pretend that Greek debt is sustainable, and that their taxpayers’ money can be lent responsibly.

Finally, it adds to the pressure on Greece’s politicians, whose bickering and resistance are the last material obstacle to the bailout going ahead, and a disorderly default being avoided.

The second bailout is far from enough to resolve the Greek crisis. That will require much more painful sacrifices than the ECB’s surrender of profits – losses to government creditors and probably the extension of yet more official credit to avoid financial chaos. But if Greek politicians agree to the terms of the current bailout, the pain can be delayed a little longer.


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