Thursday, 16 February 2012

Report by Die Welt that Greece buys ECB (Updated)

According to unconfirmed reports the ECB would sell all of its SMP holdings back to Greece at par. You may ask were would Greece find the money to do so. Well, Greece can always issue new Greek bonds in lieu of payment and do an exchange through the Euroclear accounts. This is a standard restructuring trick aiming to avoid compliance issues with off market transactions. But compliance is only for commercial banks not for central banks and governments. Or it could get newly issue EFSF bonds to do so but this is harder as it requires approval by the national governments. We do not know the nature of the new bonds but one has to assume that they would be under English law (reports that they are under Greek law) It may further have  covenants like "the bondholder may but is not obliged to call a credit event" (like the bilateral loans under the bailout agreement).  Or it may have covenants that effectively make the new bonds senior to any other claim like "the present series of bonds are exempt from any moping up law". The later may be easier done if the new bonds are under English law.The truth is that we do not know the details.
 ECB Profits
The ECB may further distribute any profits to the NCB which can then do as they wish. the profits come from the coupons they have collected and also from the difference between purchase price and the Par redemption. The ECB has every right to distribute the profits to its shareholders the NCB's. Thus it would be up to the NCB's to return if they wish so the money to Greece. I can imagine that some may do so reluctantly.

Could this debt swap be a disorderly default omen? In other words default is coming and the ECB is jumping the ship? I doubt this very much. If Greece defaults then it would be hard for the ECB to pretend than their holdings are different. Unless of course the ECB gets EFSF bonds and the loss goes to the loan given by the EFSF to Greece i.e. Back to Germany again.
Could that debt swap have to do with the introduction of CAC using a moping up law in Greece? I think this is more likely. If this is the case, then as we said many times before it would be good news for the participation rate, bad news for big institutional investors and possibly good news for retail investors.

Some time ago we presented a proposal for improving the PSI (see, here, here and here,). It involved two stages.
  • Stage 1. Buy the ECB to reduce the hold out incentives
  • Stage 2. Offer the option to cash out bondholders alongside the bond swap.
We argued that this would reduce the debt to GDP for Greece to around 100% from day one making it sustainable. If the reports are right Stage 1. is completed. It remains to be seen if Stage 2 would be adopted.