The European Central Bank is considering using its bond holdings to bolster Greece’s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said.
Under one plan, the ECB could sell its Greek bonds to the European Financial Stability Facility at the price it paid for them rather than accept a loss along with private creditors, two of the people said. The EFSF is against that proposal because it may stretch its capacity, the officials said. Another plan is for euro-area central banks to give up profits or take losses on Greek bonds in their investment portfolios. Several options are under informal consideration and none have gained traction so far, two of the officials said. Spokespeople for the ECB and the EFSF declined to comment.
The central bank’s discussions have taken place as Greece, its private creditors and international authorities struggle to assemble a new aid package big enough to contain the crisis. The European Union is under pressure to reach a deal with Greece and its creditors soon because of a 14.5 billion-euro ($19 billion) Greek bond payment due March 20.
In October, the EU, Greece and private creditors agreed to a deal that includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and 130 billion euros in official loans. That deal, which also involves the International Monetary Fund, requires Greece’s debt burden to fall to 120 percent of gross domestic product by 2020.
As Greece’s economic outlook has worsened, public creditors have pressed for further concessions to meet this target, prompting markets to look to the ECB as a possible source of additional contributions.
Selling the ECB’s Greek bonds to the EFSF, which is directly backed by euro-area governments, would allow those assets to be used in the writedown without compromising the central bank’s independence.
“It would be a much more ideal situation than the ECB actually taking a loss,” said Peter De Keyzer, chief economist at Fortis Bank in Brussels. “All the right incentives stay in place. It doesn’t affect the ECB’s potential willingness to buy debt in the future.”
The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since May 2010. Between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
The ECB’s talks have also looked at having euro-area central banks give up profits or take losses on Greek bonds in their investment portfolios, which are separate from the bonds the ECB buys in its asset-purchase program, one official said. The Financial Times Deutschland yesterday reported the ECB is looking at this option.
Downsides are that it might make only a limited amount of money available and could also have a disproportionately big impact on the Greek central bank, the person said.
The EFSF-linked plan faces resistance from the fund and its member countries because of concerns about the rescue facility’s capacity, two people said. The 440 billion-euro EFSF has already committed to provide 44 billion euros for Portugal and Ireland. The fund’s ability to respond to further crises is also limited by expectations of its contribution to a second rescue package for Greece.
The euro region still hasn’t decided whether the EFSF and its successor, the 500 billion-euro European Stability Mechanism, must share the same aid ceiling or run in parallel to allow more borrowing room. Stacking the two funds is on the agenda for a March summit of EU leaders.
No matter what method is used, the ECB needs to avoid incurring a net loss, said Marco Valli, chief euro-area economist at UniCredit Bank AG in Milan. If the EFSF bought bonds from the ECB at the central bank’s purchase price, “at the end of the day, the loss would move from the ECB to governments,” he said.