The European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said.
The Frankfurt-based ECB is exchanging its Greek bonds for bonds of an identical structure and nominal value, the only difference being that they would be exempt from so-called collective action clauses, the officials said late yesterday on condition of anonymity. One said the bonds have a face value of about 50 billion euros ($65 billion). An ECB spokesman declined to comment. Giorgios Zanias, chairman of the Council of Economic Advisors to the Greek Finance Ministry, didn’t respond to calls to his mobile phone.
The move may be completed by Monday, the officials said. That could pave the way for a private-sector bond swap that aims to slice about 100 billion euros off Greece’s debt as the embattled nation struggles to stave off default. Euro-area finance ministers convene in Brussels on Feb. 20 to discuss a second bailout for Greece that includes a debt-swap agreement.
An exemption from collective action clauses, or CACs, would mean the ECB would not have to participate should the Greek government impose involuntary losses on bondholders. That may occur if not enough private creditors agree to a voluntary swap.
‘More Equal Than Others’
Greece will submit legislation to parliament on Feb. 21 to allow the use of CACs in a debt-swap process that will start on Feb. 22 and conclude on March 9, Athens-based Naftemporiki newspaper reported today.
CACs typically make all bondholders subject to losing part of their capital in a retrospective action that does not require the assent of all lenders. The officials said the new Greek bonds the ECB will receive in exchange for its old ones are exempt from CACs.
“In Europe, all bond holders are equal, but the ECB is more equal than others, apparently,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “This could set a dangerous precedent, and, by creating a de-facto two-tier market, this could discourage investment in other peripheral debt markets.”
Bundesbank President Jens Weidmann didn’t support the ECB’s decision to swap the bonds on concern the move would prompt legal action by other Greek bondholders, Der Spiegel magazine reported, citing ECB officials it didn’t name.
As much as $3.2 billion of credit-default swap insurance is at risk of being triggered if CACs are used, according to data from the Depository Trust & Clearing Corp., which runs a central registry for the market. The introduction of CACs doesn’t in itself trigger default swaps, though using them does, according to rules of the International Swaps & Derivatives Association.
Exempting the ECB from a debt restructuring may weaken the euro as it implies a senior status over other investors, Chris Walker, a foreign-exchange strategist at UBS AG in London, wrote in a research report today.
“The risk of a voluntary restructuring morphing into a coercive one has arguably increased significantly,” Walker wrote. “If this ECB plan goes ahead it may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders, not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing.”
The ECB began purchasing Greek government debt in May 2010 as part of its Securities Markets Program, which is aimed at restoring the transmission of monetary policy on financial markets distorted by the sovereign debt crisis. Since then, it has bought bonds including those of Spain, Portugal and Italy totaling 219.5 billion euros.
The ECB is barred by its founding treaty from directly financing governments. Taking a loss, or haircut, on its Greek bond holdings would amount to so-called monetary state financing, ECB President Mario Draghi said on Feb. 9.
Germany’s Die Welt newspaper reported the bond swap yesterday and said it would result in a profit for the ECB, which it could then distribute via national central banks to governments.
In fact, the swap is separate from the ECB’s deliberations to contribute in some way to reducing Greece’s debt load, the three officials said.
The ECB has signaled it may distribute to national central banks any profits from its Greek bond holdings when they mature, so that they can pass that cash on to governments to help with the Greek bailout. This remains a possible course of action, the officials said.