Posted by WARREN MOSLER on January 28th, 2011
They EU may as well buy the Greek bonds themselves and save the legal fees.
And probably get a higher rate, and, of course, the option to forgive if it ever suits them.
Amazing anything like this ‘option’ even gets this far as a trial balloon.
But it does.
EU Considers Loans to Greece to Buy Back Bonds
2011-01-28 14:20:53.271 GMT
By GABRIELE STEINHAUSER
Brussels (AP) — Lending Greece money to buy back its bonds
on the open market is “one option” under discussion as eurozone
governments overhaul their euro440 billion ($603 billion)
bailout fund, a spokesman for the European Union’s executive
Commission said Friday
Greece’s bonds are currently trading below face value,
meaning the country could buy them back at a discount and cut
its mounting debt pile.
The European Commission raised that idea in an internal
“working document” on improving the response to the debt
crisis, said Amadeu Altafaj-Tardio, spokesman for EU Monetary
Affairs Commissioner Olli Rehn.
However, he emphasized that the document wasn’t a proposal
from the Commission, adding “It will be up to the member states
to see to it that our response (to the crisis) is more
effective in the future.”
Speaking to journalists at the World Economic Forum in
Davos, Greek Finance Minister George Papaconstantinou confirmed
that the idea of bond buybacks was being discussed, but
stressed that Greece wasn’t “engaged in any official way in
Greece was saved from bankruptcy with a euro110 billion
rescue loan from its partners in the euro and the International
Monetary Fund in May, after investors worried about the
country’s high government debt sent its funding costs soaring.
In the wake of that bailout, the European Commission, eurozone
governments and the IMF set up a euro750 billion fund to help
other governments in financial troubles. That fund in November
extended a euro67.5 billion emergency loan to Ireland.
Eurozone governments are currently discussing new crisis
measures, after the bailout of Ireland failed to stop concerns
over debt levels from spreading to Portugal and much larger
Spain. At the center of these discussions is the eurozone’s
euro440 billion portion of the bailout fund — the European
Financial Stability Facility — and whether it should be
expanded and given more powers.
In a paper published Monday, London-based consultancy
Capital Economics calculated that an EFSF-funded bond buyback
program based on the market price of Greek bonds last week,
could cut Greece’s debt pile from about euro260 billion to
around euro194 billion. That would mean that at the end of this
year, the country’s debt would stand at 126 percent of economic
output as opposed to 154 percent, Capital Economics estimated.
However, even that reduction might not eliminate fears over
Greece’s ability to repay its debts, Ben May, European
economist at Capital Economics, said in an interview.
On top of that, telling investors that there is a buyer for
their bonds would likely push up bond prices and there is no
guarantee that all investors would be willing to sell their
bonds at a discount. “So the savings would be much less than
the current market price would suggest,” May said.
To make the buyback effective, any loans from the EFSF
would have to come at very low interest rates, said May. For
its current bailout, Greece has to pay interest of more than 5
percent. Germany and other key funders of the EFSF have so far
opposed lowering interest rates.
Masha Macpherson in Davos contributed to this report.