24 January 2012

FT: ECB under pressure over Greek bond hit

The International Monetary Fund has turned up pressure on European officials to take on more of the burden of filling a widening gap in Greece's budget by pressing the European Central Bank to take a hit on its €40 billion in Greek bond holdings.

The ECB bought the bonds at below face value as part of a programme to prevent the collapse of Greek debt markets in 2010. It has also been accepting Greek bonds as collateral for cheap loans to teetering Greek banks. The bonds, with estimated yields in excess of 7 per cent, will provide a big return if Greece does not default and they are held to maturity.

An IMF official denied the fund was pushing any specific action on the ECB, including writing down the value of its debt or reinvesting the profits made from the bonds back into Greece. But eurozone officials involved in the discussions said the pressure to earmark potential gains to fill Greece’s financing hole was being resisted by the ECB.

Private investors have begun to chafe at the ECB’s insistence its bonds be paid in full while the private bondholders are being urged to agree to a cut of at least 50 per cent on the face value of their holdings. Charles Dallara, the lead negotiator for a consortium of banks and insurance companies, called on “all parties to honour those commitments”, including the ECB.

Despite the ECB’s resistance, the Governing council has discussed fallback positions. These have included the possibility of the ECB forgoing the profits it expects to make on the bonds, according to one person familiar with ECB discussions. Another option would be to take losses on Greek bonds held by eurozone national central banks in their own portfolios.

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