ECB To Fund Eurozone Central Banks As PSI Sweetener

Tyler Durden's picture

A number of headlines from Bloomberg, via Die Welt, that the ECB will undergo a bond swap with the NCBs on their greek government bonds and the 'profit' will flow to governments.

  • *ECB SWAPPING GREEK BONDS FOR NEW GREEK BONDS, WELT SAYS
  • *ECB BOND SWAP TO BE COMPLETE BY MONDAY, WELT SAYS
  • *ECB TO PROFIT FROM BOND SWAP, WELT SAYS - Explain please!
  • *WELT: ECB SWAPPING EST. EU50 BLN GREEK BONDS AT NOMINAL VALUE
  • *ECB TO DISTRIBUTE PROFIT FROM SWAP TO GOVERNMENTS, WELT SAYS

This is absolute delusion. The ECB (via the NCBs) claims EUR50bn nominal value of GGBs - so likely took a EUR20-30bn loss on this given the prices they bought at under the SMP and the current market price. We explained last week (must-read) the delusional nature of these profits (that will disappear immediatley the new bonds break) and assume this is yet another attempt to make market participants believe they wil help with PSI. However, there is more to this in our humble opinion. Since the ECB says they will distribute profits (which we know are illusory) to governments - it is nothing but a covert attempt to funnel money (think printing) to local government central banks (accept 20c bonds and offer 100c bonds) - and the illusory profits here are simply giving away free money to the NCBs. Perhaps the loud screaming over the pain associated with even an 'orderly' Greek default is enough that the ECB needs to placate them with some new freshly printed money? For now, the PSI remains in limbo for the hold-out blocking-stake reasons we have discussed at length - if the ECB were to step into the market and buy/swap with hold-outs all of their UK-law bonds at Par (for huge gains to the hedgies) then perhaps we get a deal done - but this would be astounding and leave the rest of the European sovereign debt market disabled as investors pushed for the same deal and vigilantes drove Portugal and then Spain to this point...

Please explain how a notional swap in any helps the Greeks? (no debt reduction)

No surprise we see this -

  • *ECB SPOKESMAN DECLINES TO COMMENT ON WELT BOND-SWAP REPORT

Finally, and as before, we issue a formal question to Mr. Draghi to point out just where on the chart below does the ECB book profits on Greek bonds?

 

And some overnight insight that we tend to agree wth from Credit Suisse:

We remain very cautious about the long-term sustainability of the debt after restructuring, and it is just possible (not our core case) that the troika takes the rational decision that it is cheaper to let Greece default and reimburse the ECB for its approx. €30bn of GGB losses than to pay the rising but nominally €130bn. Yet it was only on 14 February (two days before writing) that the ECB was confidently talking of distributing its GGB profits, so we are cautious about second-guessing the analytical framework being used.