Rumors That ECB Will Transfer Greek Bonds To EFSF

via Peter Tchir of TF Market Advisors,


It has been rumored before, but allegedly the potential for the ECB to transfer bonds to EFSF is back on the table.

The ECB would transfer the bonds at cost to the EFSF (net of interest earned?) and the EFSF would participate in the PSI.


There are some positives in this.  Greece would get additional savings.  With holdings of over €50 billion, a 50% principal write down would be helpful to the overall situation.  It would also make it more clear that the bonds held by the ECB aren’t effectively subordinating other debtholders.  Those are positives.

There are also some definitive negatives.   Let’s say they transfer bonds at a price of 80% of par.  Then the EFSF would lose about 50% of par immediately (assuming a post restructuring price of 60% for the new bonds).  That would be a loss of over €25 billion.  It is just taking money from the EFSF.  That is bad on a couple of fronts.  The obvious thing is that the ability to leverage EFSF at all (and yes, some politicians continue to talk about that) is basically gone.  If the Troika will just use the EFSF as a way to bury losses they don’t want to take directly, no one will lend to EFSF on a leveraged basis.  Since most people doubt EFSF would be leveraged, it doesn’t have a huge impact, but is important.


The other negatives are slightly more subtle, though they could come out loud and clear.  The ECB could have taken the loss directly and just printed money for that loss.  So this demonstrates an unwillingness to print money.  The ECB could take the loss and get capital from the member states.  By using the EFSF rather than new capital calls, it is a sign that countries are at the limit of what they will contribute.  Hoping for new money is unrealistic – since this was the perfect opportunity to put up new money and tell the world that Europe is truly united and willing to contribute.  This just uses up money that was already allocated.

It will get very interesting if some countries actually come out against this.  If the EFSF was going to use guarantees to issue debt and then buy bonds of the PIIGS, that was one thing.  Now they are going to borrow money so they can hand it to the ECB.  That is different and may annoy some of the more prudent countries.  They may remain silent, but this can be a source of disagreement, and frankly, should be.