The European Political Newspaper
February 02, 2012, 07:31
EU UPDATE
575
Will ECB participate in PSI in favour of Athens?
ARTICLE | FEBRUARY 1, 2012 - 4:52PM
All this week, European financial markets have kept rising,
discounting the probability of a swift Greek deal. From Athens to London and
from Paris to Frankfurt, stocks have strengthened despite the strong negative
political and social reactions in Greece over the troika’s demands for a
complete deregulation of the country's labour market.
The troika has been for two years and probably will be until
2015 the only source of finance for the Greek government. Without it, Athens
would go bankrupt. On 20 March, a huge Greek bond of €14.4 billion will expire
and must be redeemed. Without the support of the troika, Athens will collapse
before the end of next month.
In view of these bleak prospects, troika representatives are
now in Athens negotiating with the Greek government not only the financial
terms of a new soft-loan package but also the policy mix needed to increase the
country's competitiveness and thus help it enter a virtuous growth cycle again,
as was the case during the first years of the new millennium. But let’s take
one thing at a time.
Agreement with all creditors?
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As things now stand, it seems that a deal with the country's private creditors (Private Sector Involvement (PSI)) is about to be concluded, providing a ‘haircut’ of 50% on the nominal value of the Greek bonds that they hold. Then comes the equally difficult part, which is finding agreement with the troika.
These final official creditors are
gradually undertaking an increasing part of the Greek debt – the European
Central Bank (ECB), for example, now holds a round sum of €50bn in Greek bonds,
which it bought in the secondary market at reduced prices, over the past 12
months.
Incidentally, it should be noted
that if the ECB keeps those bonds until they mature, the central bank will make
a huge profit, somewhere in the region of €15bn, which does not make sense,
given that the monetary authority is supposed to help Greece and not register
profits at the expense of Greek taxpayers.
The ECB
This is why there is now growing pressure by the IMF and Eurogroup President Jean-Claude Junker for the ECB to participate in PSI. If this goes ahead, the ECB could cover the €15bn gap that is expected to remain after PSI is concluded with the banks.
This is why there is now growing pressure by the IMF and Eurogroup President Jean-Claude Junker for the ECB to participate in PSI. If this goes ahead, the ECB could cover the €15bn gap that is expected to remain after PSI is concluded with the banks.
The idea behind this is that the
Greek debt should be reduced to 120% of GNP by the year 2020, in order for it
to be classified as “manageable” by the IMF. A 50% haircut to the debt paper
held by banks is expected to leave a gap of €15bn, exactly this sum that the
ECB now being asked to cover for the benchmark ratio of debt to income of 120%
to be attained.
The Germans
Berlin, however, seems to oppose involving the ECB in an operation helping a member state to reduce its sovereign debt. The German government argues that such assistance by is forbidden by the central bank’s status. They also point to the possibility of other programme countries such as Portugal and Ireland requesting the same assistance, given that the ECB holds many of their bonds.
Berlin, however, seems to oppose involving the ECB in an operation helping a member state to reduce its sovereign debt. The German government argues that such assistance by is forbidden by the central bank’s status. They also point to the possibility of other programme countries such as Portugal and Ireland requesting the same assistance, given that the ECB holds many of their bonds.
The central bank also holds Italian
and Spanish bonds, and these countries might ask for the same 'favour' as well.
However, it would cost the ECB nothing, because while buying these bonds at
reduced secondary market prices, it has written them into its books at buying prices,
so now all it has to do is accept a swap of those titles for new ones plus cash
in the realisation of the PSI agreement.
If the ECB participates in the PSI,
this will greatly facilitate the conclusion of the other agreement between
Greece and the troika for the second loan package of €130bn to cover the
country's financial needs until 2015.
There has been a first package of
soft loans for Greece agreed in May 2010 of €110bn, but Greece failed to meet
the terms accompanying it, largely due to a deep recession that claimed more
than 10% of the country's GNP in two years. Both packages are financed mainly
by Germany, which is why Berlin is insisting that Greece applies further
austerity and structural measures along with large-scale privatisations, in order
to cover the gap of €15bn after the PSI is concluded.
Tough times in Athens
Unfortunately, political and social life in Greece is disintegrating rapidly and the impoverishment of the middle classes has already accentuated the presence of extremist political formations, on the left and right of the mainstream.
Unfortunately, political and social life in Greece is disintegrating rapidly and the impoverishment of the middle classes has already accentuated the presence of extremist political formations, on the left and right of the mainstream.
For example, the now-governing
socialist PASOK party, with 153 seats in a parliament of 300, is fifth in
opinion polls, barely managing 10% of the share. At least two thirds of those
153 deputies will not return to parliament after the next general election this
spring, and they have announced that they will be making a 'sortie grandiose'
by not voting for the second MOU with the creditors.
If this threat materialises, the
Papademos government will fall and the Germans will find nobody with whom to
negotiate, but this is something that nobody wants.
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