ECB signals move on Greek debt

Even though Greece’s government missed another deadline to come up with a list of painful reforms, the European Central Bank (ECB) has signalled it will exchange its Greek bond holdings in order to reduce the country’s debt.

The ECB has agreed to exchange Greek bonds it bought last year for bonds of the European Financial Stability Facility (EFSF), the eurozone's temporary rescue fund, the Wall Street Journal reported, citing anonymous sources.

The idea is that ECB will exchange €50 billion of Greek bonds it bought for €39 billion to the EFSF, which will not hold the bonds on its balance sheet. The EFSF will return the bonds to Greece, which will then agree to repay the EFSF for the purchase price of the bonds, in effect reducing its debt by as much as €11 billion, the paper reported.

However, the exchange won't take place unless Greece's ongoing debt restructuring talks end successfully.

Meanwhile, Greek parties failed yesterday (7 February) to reach a deal on a package of reforms to cut the country’s debt.

Missing deadline after deadline, leaders of the three parties in the coalition of Prime Minister Lucas Papademos postponed what was supposed to have been a crunch meeting until today.

Papademos – a technocat parachuted in last November to secure a new €130-billion rescue deal from the International Monetary Fund and EU – is trying to persuade the party leaders to accept austerity and reform measures which are likely to prove highly unpopular with an angry Greek electorate.

Facing a parliamentary election as early as April, coalition leaders showed little sense of urgency, despite demands from eurozone leaders to make up their minds fast. Greece faces bankruptcy next month unless it gets the rescue funding to meet big debt repayments falling due.

"We can't say a plain yes or no unless we have assurances from the relevant authorities of the state that these actions are constitutional and will lead the country out of the crisis," said George Karatzaferis, who leads the far-right LAOS party.

As Greek bailout talks approach a dramatic turn, French President Nicolas Sarkozy and German Chancellor Angela Merkel suggested on Monday (6 February) creating an escrow account to partially reimburse the country's creditors in case of default.


Under the Greek rescue plan, private creditors are being asked to voluntary accept a nominal 50% cut in the value of their Greek bond holdings in return for a mix of cash and new bonds.

Private-sector involvement is a key part of a new €130-billion bailout package that needs to be in place by March to ensure Greece does not default on its massive debt.

But talks are not progressing as fast as hoped. The issue is pressing, since a new bailout for Greece from the International Monetary Fund and the EU is hanging in the balance pending the success of private-sector involvement.

The failure to agree on the private sector's role comes at a critical moment in the euro crisis, adding to market jitters.

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