IMF Calling For ECB To Take Hit On Its 40 Billion in Greek Debt
January 25, 2012
The current focal point of the Eurozone debt crisis is the negotiations between Greece and its private bondholders. In case you don’t follow this story on a minute-by-minute basis, the crux of the matter is simple. Greece needs to reduce the amount of debt it currently owes if the country has any chance of meeting the expected debt-to-GDP ratio of 120% (the ratio currently stands at 160%) required by the provisions of the EU/ECB/IMF bailout packages.
With Greece in the grips of a vicious recession that has cut into tax receipts and has been ongoing for nearly five years now, the plan to reduce debt via economic growth appears to be nothing more than a pipe dream at this stage. Thus, Greece must convince private sector bondholders to restructure the current debt levels, which means writing down nearly 70% of the current bonds.
Obviously, private bondholders, who are primarily European banks and hedge funds, are not excited to take a further hit on their investments. However, with default as the only other viable option, it appears that the bondholders have agreed to take the loss. At issue now in the negotiations is the rate of interest the bondholders will receive on the new Greek bonds.
While bondholders are looking for a coupon yield on the new debt to be north of 4%, Greek and European officials contend that the rate must be no higher than 3.5% if Greece is to achieve its debt goals.
Negotiations appear to have stalled on this point. Recall that officials expected to have an agreement on the debt restructuring in place by the beginning of this week. However, Greek officials have extended the deadline to February 13. As such, the negotiations continue to drag on.
There is another development in the story this morning a the FT, citing Eurozone officials, reported that the IMF has ratcheted up pressure on the ECB to take a hit on the € 40 billion in Greek bond holdings the central bank holds. Apparently the IMF wants the ECB to participate in the restructuring to the same degree as the private sector.
The FT said that while the ECB has resisted calls to write down the value of the Greek debt it owns or reinvest the profits back into Greece, the central bank’s governing council has discussed concession plans. The article noted that these plans have included the possibility of the central bank forgoing the profits it expects to make on the bonds, along with having the individual national central banks take losses on the Greek bonds in their own portfolios as opposed to the losses showing up on the ECB’s balance sheet.
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