The European Central Bank is likely to refuse to show its hand on how it will help cut Greece’s debt burden until investors and the government have agreed to a deal, said economists from ING Group to Deutsche Bank.
While Greece’s creditors are increasing pressure on the ECB to join the bond swap being negotiated with the country, central bankers have remained silent on their intentions. Economists say the ECB wants to see the private-sector agreement concluded before indicating its strategy, which may include forgoing profits from its Greek bonds or a transfer to one of the region’s rescue funds.
The Greek government needs to reach a deal and secure a second European Union-led bailout by March 20, when it faces a 14.5 billion-euro ($19.1 billion) bond payment. Charles Dallara, who as managing director of the Institute of International Finance leads a group negotiating on behalf of creditors, says involvement of public institutions is needed as bondholders hold only about 60 percent of Greek debt.
“Politicians will bang their heads against the wall trying to get the ECB to be involved at this stage,” said Carsten Brzeski, senior economist at ING in Brussels. “The ECB will stay out of this as long as it can. While they won’t take a haircut, not booking profits would be a realistic option.”
At a summit in Brussels this week, ECB President Mario Draghi rejected the idea of transferring back profits from bond holdings to the Greek government, according to a person with knowledge of the discussions who declined to be identified because the talks were private. Greek government spokesman Pantelis Kapsis said yesterday that officials expect to complete talks in the next days.
The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since 2010. Between 36 billion euros to 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
When the ECB started buying bonds as part of its Securities Markets Program, Greek 10-year bonds traded at 84 cents on the euro. Since then, prices have dropped to 23 cents as investors’ concern about debt sustainability has pushed the country close to default. The ECB insists that the purchases are aimed at restoring the functioning of its monetary policy.
“The ECB remains against an involvement simply because monetary and fiscal policy would cross paths,” said Silvio Peruzzo, euro-area economist at Royal Bank of Scotland Group Plc in London. “Participating would severely undermine the role of the ECB in crisis management.”
The ECB is “not party” to ongoing discussions between the Greek government and the private sector, Draghi said on Jan. 19, without elaborating further.
ING Groep NV Chief Executive Officer Jan Hommen said this week it would be “logical” for the ECB to participate in alleviating Greek debt.
“I’m not saying they should take a loss,” Hommen told reporters in the Hague. “But they have a potential gain on their position which they bought at a discount.”
Even if the ECB remains outside the outright restructuring of Greece’s debt, policy makers have not ruled out other involvement. The region’s central banks will await the outcome of the deal currently being negotiated, Bundesbank board member Joachim Nagel told Deutsches Anleger Fernsehen yesterday.
Economists have suggested options that include the ECB selling back its holdings to Greece, or to Europe’s temporary bailout fund, the European Financial Stability Facility, or to its successor, the European Stability Mechanism.
“The ECB could promise to sell their holdings of Greek sovereign bonds upon maturity to the Bank of Greece at their original purchase prices,” said Holger Schmieding, chief economist at Berenberg Bank in London.
A “middle way” might involve the EFSF or Greece, via an EFSF loan, buying the bonds off the ECB at their original purchase price, said Mohit Kumar, head of euro-area rates strategy at Deutsche Bank in London.
Selling the bonds to the ESM would be the best option, said ING’s Brzeski. The permanent rescue fund will have the capital available to fund such a move, while the EFSF would have to raise money in the market beforehand, he said.
“It’s possible that the ECB is already working on a compromise behind closed doors,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “It’s a dangerous game.”