The International Monetary Fund’s pressure on the European Central Bank to take part in Greek debt writedowns may backfire by deterring the central bank from extending its program of buying bonds from distressed nations.
Greek creditors meet in Paris on Thursday to discuss a debt-swap designed to halve the nation’s privately held obligations by eliminating 100 billion euros ($132 billion) of debt. While bonds bought by the ECB in its Securities Market Program are exempt from the deal, Greece needs to trim its burdens further to qualify for further aid and make a payment of 14.5 billion euros on March 20.
“They will have to think of something, but it would be wrong to force the ECB to take losses,» said Stuart Thomson, who helps oversee $121 billion at Ignis Asset Management in Glasgow. «The ECB taking a haircut would imply a fiscal transfer, which isn’t its mandate. And the SMP would collapse if they do that. We can do without another rout in the market.”
The ECB has purchased 219 billion euros of government debt since May 2010 to restrain rising yields from undermining its monetary policy. About 36 billion euros to 55 billion euros of that is Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
The program initially focused on Greek, Portuguese and Irish debt and then was extended in August to Italian and Spanish bonds. Since then, two-year Italian bond yields dropped 157 basis points to 2.95 percent and the rate on five-year Spanish debt has declined by 151 basis points to 3.86 percent.
Christine Lagarde, a former French finance minister who’s now the IMF’s managing director, told reporters in Paris last month that European governments and other public holders of Greek debt may have to increase support if private creditors don’t go far enough. Angel Gurria, secretary general of the Organization for Economic Cooperation and Development, said it would be a «good idea» for the ECB to accept losses on Greek bonds.
ECB participation in the writedowns would help shave an additional 11 billion euros off Greece’s debts, according to an estimate by RBC Capital Markets. The central bank 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 euro-region officials who declined to be identified said last week. Euro-area central banks may opt to give up profits or take losses on Greek bonds in their investment portfolios, the people said.
Playing a part
Christophe Frankel, the EFSF’s deputy chief executive officer, said on Wednesday that the fund will «probably play a significant role» in Greece’s private sector debt writedowns, without elaborating.
The European Union, Greece and private creditors agreed in October to a deal that includes a loss of more than 70 percent for bond holders in a voluntary debt exchange and 130 billion euros in official loans. The deal, which also involves the IMF, requires Greece’s debt burden to fall to 120 percent of gross domestic product by 2020, down from the 198 percent level forecast for this year.
European banks own most of the 200 billion euros of Greek debt held by non-government investors. Hedge funds, pension funds, sovereign wealth funds and other «non-regulated investors» own a further 60 billion euros, according to estimates by Pavan Wadhwa, JPMorgan Chase