Guest Post: The Great ECB-OSI Bond-Swap Scam

Tyler Durden's picture

Submitted by Dimitrios Giannopoulos of, as a follow up to his earlier piece, "OSI still holds up PSI deal"

The Great ECB-OSI Bond-Swap Scam

A massive 150bn euro bill exclusively reserved for the EU-IMF funding of the "official" (OSI) and the private (PSI) sector participations in the Greek writedown on Greek debt may be the key factor behind the ongoing delays in the eurozone finance ministers' approval of a second bailout for Greece.

This factor remains concealed behind media hysteria about the supposed failure of Athens to comply with a brutal austerity diktat by the EU-IMF-ECB 'troika'.

According to a confidential document of the finance ministry's general accounts office (GLK), the European Central Bank and its national central bank network in the "eurosystem", holding a total of around 60bn euros of Greek bonds, have found a technically tangled, legally dubious and financially costly way to avoid participating in the haircut of 50 percent on the face value of privately held Greek bonds.

This magisterial act of accounting alchemy would involve a one-by-one "swap" of 56.3bn euros worth of Greek sovereign bonds - purchased from the secondary market at an average discount of 20 percent as part of the central bank's Securities Markets Programme (SMP) in May-June 2010 - with new bonds issued by the Greek state, carrying the exact same financial and legal provisions as the old ones, except for new serial numbers (ISINs).

According to the ECB experts who have devised this peculiar OSI blueprint, the bond swap should shield ECB-held bonds from the obligation to take the same losses as private bondholders when the Greek government imposes Common Action Clauses (CACs) on the old bonds to force a minority of private bondholders to submit their portfolio to the agreed debt writedown.          

Under an October 27 EU summit decision based on an IMF debt sustainability report, only a 100 percent participation of eligible private bondholders in the proposed PSI (private sector involvement) would cut the required 100bn euros off the country's 370bn euro debt to reach a "sustainable" debt-to-GDP ratio of 120 percent by 2020, from its current level of 165 percent of GDP.

The PSI deal involves banks, investors, hedge funds and pension funds swapping bonds they hold for longer-dated securities that pay a lower coupon of around 3-3,5 percent, resulting in a real 70 percent reduction in the net present value of the old bonds.

The bond exchange is expected to launch on March 8 and complete three days later to meet a deadline for a 14.4-billion-euro bond repayment due on March 20 allowing Greece to avoid default.        

But the confidential GLK document notes that the parallel ECB bond swap at par value must also be financed by the EFSF and added to Greek debt.

"The old ECB bonds will be transferred to a treasury account of the Greek state for the duration of the PSI bond swaps, and will therefore be charged on the level of Greek debt by the additional amount of 56.3bn euros," says the GLK document.

This means that the funding of the 56.3bn euro ECB "bond swap" must be "financed" by the EFSF together with other components of PSI funding under the second EU-IMF bailout plan for Greece whose exact size remains to be decided by the Eurogroup in today's meeting of the 17 finance ministers in Brussels.    

However, one of the official documents of the new Greek bailout pact with its official creditors passed in parliament on February 12, details some of these EU-IMF loan components including:

  • Bond sweeteners offered to PSI participants - €30bn
  • Funds to buy back bonds held as collateral for ECB loans to banks - €35bn
  • Funds to pay off accrued interest payable in 2012 - €5.7bn
  • Bank recapitalisation - €23bn
  • Total - €93.7bn

The new debt from the ECB bond swap of 56.3bn euros should therefore be added to the above total of 93.7bn euros enshrined in the "PSI LM Facility Agreement" between Greece and the EFSF. Not surprisingly, the grand total of the two sums adds up to exactly 150bn euros.

The question is how will the Eurogroup approve these PSI participation costs that far exceed the supposed gain from the 100bn euro "haircut" but also leave nothing to cover Greece's debt servicing obligations for 2012-2014 of at least another 70bn euros to say nothing of possible budget deficits due to the collapse of public revenues in the fifth consecutive year of a Greek depression.

All the histrionics about forcing Greece to set up a separate “escrow account that would give legal priority to debt and interest payments over paying for government expenses”, is nothing but a smokescreen for piling massive sums of fresh public debt on Greece's shoulders without lending a single penny to make up for the economic catastrophe meted out on the country.  

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Dr Paul Krugman's picture

It's not a scam.  It is what it is:  a swap.

After Geece begins growing, they will be able to afford the debt.  Then the bonds will have an increase in demand, and price will rise.

Gypsyducks's picture

How exactly does this swap allow Greece to reverse it's deficit and meet or exceed the IMF projected GDP forecast?

Dr Paul Krugman's picture

It allows Greece ro grow, and then it can reverse and pay down the debt.

falak pema's picture

oh it'll grow, a whole program of real estate on choice locations where nobody pays taxes; it'll grow crime and black market as state declines even more, it'll grow corruption and military spending and it'll grow debt once again to 160%. 

It won't grow good governance. For that you have to have people's interests being defended. WHo will do that? 

A German bureaucrat twiddling his thumbs? He has only ONE job : make sure the Oligarchs pay their debt interest to PSI/OSI; until the can kicking has to stop...

Do you really think the Greek economy can grow with a Euro currency around its neck and energy going to 150$/bbl?

Dream on!

Buck Johnson's picture

It won't work and the debt is just to big for them to handle, it truly is.  They can't pay off this debt with the demographics they have.

GetZeeGold's picture



Dr Paul Krugman

It allows Greece ro grow, and then it can reverse and pay down the debt.


Yeah....first they have to grow......then they have to reverse. Bad news chief.....they will do neither.


That's cute Dr. Paul Krugman.......former advisor to Enron.



Quaderratic Probing's picture

Today I'm announcing the Greek Moon project. I will be selling bonds for the moon condo mission starting ASAP. The whole population will be involved in prefab condo manufacture. Space craft and launch pads will be needed too. I think about ten trillion will get it done. Lets print the cash and get going! Greek growth will be the envy of the world. Condo prices will start at $18 billion per square foot. Be the first to get in on the Moon condo flipping craze

Bansters-in-my- feces's picture

Hey Krugman...

You rock like Scooby Doo.

ACP's picture

Please explain why the economy will grow. Oh yes, because of the debt swap. And why will it work? Oh yeah, because the economy will start growing? And wy will the economy grow? Because of the debt swap.

That's called a circle jerk!

littleguy's picture

Oh how I wish you really were Paul Krugman. Then hopefully you'd be offended when I told you you were a moron and don't deserve your Nobel prize or doctorate for that matter.

Many happy returns twat-features.  

Bunga Bunga's picture

I heard that the Nobel Price in Medicine this year goes to: "Healing cancer by growing the organism faster than the tumor".

Good luck.

Confundido's picture

After Greece begins growing? So, Dr. Krugman, you start defending a thesis taking an unproved assumption for an axiom? That doesn't pass any logical test. 

Start telling us how the f... Greece begins growing...and then we can talk. We are not the average public here at 

Bonds will not have an increased demand, particularly after all the financial repression attached to them. The demand will come from central banks or their forced frontmen, the EU banks. But who's kidding whom?


hedgeless_horseman's picture



Less like a scam and more like another wealth transfer from common citizens to banks so the shareholders do not take a loss.  Scams tend to be less obvious.

Shut up and pay the inflation tax, bitchezzzz!!!

Dr Paul Krugman's picture

Then the banks will loan to the tax payers, creating jobs, and then the economy will have created sustainable growth.

Irish66's picture

Are you trying to convince yourself?

hedgeless_horseman's picture



The truly sad thing, good Doctor, is that a vast majority of the people in the world cannot discern the flaws in your trollish logic. 

"The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class."


— Rothschild Brothers of London, 1863

Bunga Bunga's picture

"sustainable growth" ... even Charles Ponzi would laugh his ass off.

Dcheeth2's picture

Small flaw in your thesis.


Greeks don't pay tax. 

Bansters-in-my- feces's picture

@ Dr Paul Krugman...

You Sir are one delusional fucking puppy.

Ben...? that you..???....or Timmy....???

Joebloinvestor's picture


You don't crawl out of hole by making it bigger (are you listening AMERICA?).

hedgeless_horseman's picture



You don't crawl out of hole by making it bigger (are you listening AMERICA?).


Martin W's picture

It is so complicated that I almost forget it is still a pure Ponzi

Eclipse89's picture

only a 100 percent participation of eligible private bondholders in the proposed PSI (private sector involvement) would cut the required 100bn euros

What if someone changes this to: at least 51 percent participation of eligible private bondholders in the proposed PSI (private sector involvement) would cut the required 100bn euros ?

At this stage expect everything and exclude nothing..

JohnG's picture

All these acronyms remind me of STD's, or in the old days, plain old VD.


Ewwwww, now I feel dirty.  Need a BATH.

ghostfaceinvestah's picture

Given that there are now two classes of sovereign debt: senior debt owned by central banks, and subordinated debt owned by everyone else, shouldn't each country's debt have two ratings?

Ghordius's picture

Don't worry, we might get again the "owned by fleet-bearing" creditors

Tic tock's picture

the swap has nothing to do with Greece's ability to grow - the swap shields the ECB. unless you are suggesting that the credibility of the ECB is fundamental for Greek growth

Gamma735's picture

How about Greeks working for a living to grow the economy! 

distopiandreamboy's picture

Greece is going to get a bailout deal. It's going to such a shitty deal that nobody believes will ever go through and Greece will eventually have to be the one to reject it at the llth hour

pmm009's picture

My good Doctor, you know perfectly well that these people you speak of are considered write offs to a higher cause.  Greece does not have the demographics, institutions and infrastructure for competitive growth on the scale required in the next decade.  The UN forecasts will clearly show anyone who looks what is the future of Greece.  A smaller and older population.  Greece can only grow if it leaves the eruozone while remaining in the EU such that capital can be attracted to its then currency competitiveness, Drac vs Euro.  This will not happen because the Greeks do not have enough young protesters to threaten a civil war and because Greece is a keystone military reservation for NATO and Europe.

jmcadg's picture

Hey Krugman, why don't you buy up a bunch of Greek bonds, then when they rise in value due to this great interest, you'll make a killing.

Yeah, I thought so, muppet.

ljag's picture

Without the Greeks, nobody would have sponges to be worthy of...........

tom a taxpayer's picture

I need a Venn diagram to understand what this article is saying.

loveyajimbo's picture

I find it incredible that there is not a provision to allow the Greek politicians that vote for this forced rape of the citizens to get witness protection somewhere far away... as they will surely be torn limb from limb if ever caught in the street.  Hmmmm... where does Blankfein buy his lox and gefelte fish?

BlackholeDivestment's picture

What in the wide world of sport, is this Project Three TrikeZgoneWild Devil Man White Zombie crashing again? LMAO!

q99x2's picture

So is Greece getting bailed out? Yes or no. 

Nobody For President's picture

No. Greece is not getting bailed out.

The banks are getting bailed out, and some holders of Greek bonds are getting bailed out, which include Greek banks and pension funds. The Greek government may get 19% of the available funds for government services for the Greek people, but it really is NOT a 'Greek bailout' - it is a bank bailout. 

The big lie at work again, permeating through the MSM and twisting every discussion of it, except some here on ZH.

So just stop it with the 'Greek Bailout' meme, ok?

michigan independant's picture

In this sense, Krugman is not only a dead economist. He’s also a dead propagandist.

However, with a bucket shop, it could be better thought of as a place where people go to make “side bets”

Dr. Waterboy

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