European Central Bank Moves to Avoid Loss on Greek Bonds

LONDON — European leaders have begun discussions with the European Central Bank on several options that might keep it from having to take a loss on its 55 billion-euro portfolio of Greek bonds.

For months, the proposed debt restructuring deal between Greece and its private sector creditors had excluded the central bank from taking a loss on its Greek bond holdings while banks and hedge funds would have losses of 50 percent or more.

Among the measures being discussed Tuesday, according to officials involved in the negotiations, is one in which the central bank would exchange Greek bonds that it currently owns for a different form of Greek government debt that would not be eligible for a loss.

The talks remain fluid and could break down at any moment, said the officials, who were not authorized to speak publicly.

Also on Tuesday, European Union officials pressed political leaders to turn their attention to promoting growth, amid signs that a recovery will take longer than anticipated.

José Manuel Barroso, the president of the European Commission, urged government leaders to investigate “concrete measures to stimulate growth and employment.”

The leaders are set to meet next week in Brussels,

At the close of a two-day meeting of finance ministers in Brussels on Tuesday afternoon, other officials kept up the pressure for a quick deal on refinancing Greek private debt.

Olli Rehn, the European Union’s commissioner for economic and monetary affairs, suggested that time was running out on an agreement between creditors and the government in Athens aimed at lowering Greece’s debt burden to a sustainable level.

A representative for the central bank declined to comment specifically on the negotiations, saying that they were a matter for the private sector and that the central bank was not involved.

The deal could address what has long been one of the more vexing questions in reaching a broad agreement on reducing Greece’s mountain of debt: how to prevent the central bank, the largest holder of Greek bonds, from having to participate in a debt restructuring along with private sector investors.

Private sector investors, including large European banks and hedge funds, have complained bitterly — and in some cases threatened legal action — over the central bank’s insistence that its 55 billion euros in Greek bonds were exempt from the loss that the private sector is facing, which some have estimated at 60 cents on the euro.

The central bank bought the bulk of its Greek bonds in 2010 in a failed attempt to stabilize Greece’s collapsing bond market, paying discounted prices of about 70 to 75 cents on the euro. As part of the current talks, the central bank might exchange its current bonds for a different form of Greek debt at a cost similar to that of the distressed bonds.

In that way, the bank would, in theory, not have to take a loss and Greece would get the benefit of that discount, which could reduce its debt burden. Analysts argue that such a step would be seen positively by the markets.

“It’s a smart idea and it makes Greece’s debt more sustainable,” said Miranda Xafa, an expert on the Greek economy at EF Consulting in Athens.

The latest twist in Greece’s restructuring talks comes in the wake of a lingering impasse between private sector creditors and Greece’s financial backers, Germany and the International Monetary Fund over how much of a loss banks should take.

Germany and the I.M.F. have held firm that the new bonds should carry an interest rate, or coupon, of below 3.5 percent to ease Greece’s debt burden, while the banks have fought back, saying that the subsequent loss would be too much and that the deal could no longer be deemed a voluntary one.

At a news conference in Zurich on Tuesday, Charles Dallara of the Institute of International Finance, the bank lobby representing the private sector, said that all parties in the talks must honor their commitments in the talks.

Two weeks ago, the creditors told European officials that the private sector would accept a large haircut if the European Central Bank would join in, according to bankers involved in the talks. European officials declined the offer, they said.

Now, the pressure is building on Europe to find a solution before Greece must pay 14.4 billion euros to bond holders in March or default.

The two-day meeting in Brussels ended with some progress on shoring up the euro zone. Finance ministers took further steps toward establishing a permanent bailout fund, the European Stability Mechanism, as the I.M.F. has urged. That fund could be operating by July.

Leaders still are tussling over whether the fund should have 750 billion euros to 1 trillion euros ($971 billion to $1.3 trillion) at its disposal. Mr. Schäuble has suggested that 500 billion euros is sufficient.

Landon Thomas Jr. reported from London, and James Kanter from Brussels. Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2012/01/25/business/global/eu-officials-continue-to-press-for-a-quick-deal-on-greek-debt.html?partner=rss&emc=rss