ECB Greek Bond Swap

Currency in Crisis
News that the ECB will swap its Greek bond holdings to avoid being subject to collective action clauses that the Greek government is expected to seek parliamentary approval for early next week has stopped the euro's recovery in its tracks.   The euro reached a high of just below $1.32 before the next broke, extending the rally that began yesterday off the $1.2975 low.  Initial support now is pegged near $1.3100.

The euro is still showing resilience and remains up on the day.  However, the European markets are closing and the US markets are closed on Monday, which could be contributing to the mute market response. 

The ECB appears to have agreed to swap its Greek bonds (~50 bln euros, ~$65 bln) for identical new bonds that would be exempt from CACs.  The CACs may be invoked if not enough private sectors "volunteer" to participate in the haircut which now looks to be around 70% on a net present value basis. 

The ECB's move seems strange.  Greece is not going to benefit from reduced debt if the ECB would have swapped the bonds at cost rather than nominal value.  The Bundsbank's Weidmann objected to the swap on the grounds that other Greek bondholders may sue on grounds of preferential treatment, according to Der Spiegel. 

The status of the national central banks, who bought Greek bonds previously for its investment account, is not clear.  The ECB appears to be deciding if they should be subject to the PSI.   The national central banks hold an estimated 20 bln euros of Greek bonds.  A haircut on par with the PSI would see projections of Greece's debt to GDP slip toward 120% from the 129% currently projected for 2020.

Press reports suggesting that such a haircut could force some central banks to be recapitalized is most likely an exaggeration.  Generally speaking, the revaluation of other holdings such as German and French bonds and gold, could blunt the impact from a Greek haircut. 

The risk is that after consideration, investors will not like what the ECB has done.  It raises questions about the value of other bonds that the ECB has bought.  Private sector investors in those sovereign bonds have effectively been diluted.   This is the first move by Draghi that has investors scratching their heads.  
ECB Greek Bond Swap ECB Greek Bond Swap Reviewed by Marc Chandler on February 17, 2012 Rating: 5
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