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

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.