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ECB Should Join Greek Bond Swap for Debt Viability, Nomura Says

The European Central Bank needs to take part in a Greek debt swap with private creditors for the country to succeed in reducing its debt to a sustainable level, Nomura International Plc economists said.

If Greece introduces collective-action clauses into bond contracts, debt held by the ECB would probably be included in the swap agreed upon at an Oct. 26 summit of European Union leaders, London-based Nomura economists Dimitris Drakopoulos and Lefteris Farmakis said in a note today.

“If the ECB is excluded from this exchange, attaining a 120 percent debt to gross domestic product ratio by 2020 requires deeper face-value reduction in the new bonds,” the economists said. “Such an option, however, goes beyond the October agreement and is likely to require a time-consuming redesign of the whole program. This is likely to overrun the deadline set by the March redemption.”

An alternative could be for the European Financial Stability Facility to swap the ECB’s bonds after buying them from the central bank at cost, or about 80 percent of face value, Drakopoulos and Farmakis said.

The Oct. 26 summit set out a framework for the Greek debt swap, with details such as the coupon and maturity of new bonds in the exchange to be decided in talks between Greece, private lenders, the European Union and the International Monetary Fund. The framework stipulates that the exchange should be voluntary, there should be a 50 percent face value reduction in the nominal value of the bonds and sets the 120 percent debt-to-GDP target.

The ECB holds Greek government bonds with a face value of 50 billion euros ($65 billion), marked at purchase price with an exposure of no more than 40 billion euros, Nomura estimates. Private creditors hold about 205 billion euros of Greek government bonds. Greece faces a 14.5 billion-euro bond payment on March 20.

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