Guest Post: The Great ECB-OSI Bond-Swap Scam
Submitted by Dimitrios Giannopoulos of athensnews.eu, 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 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.
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:
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.
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 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.
OSI still holds up PSI deal
AntwortenLöschenby Dimitris Yannopoulos 20 Feb 2012
The role of the "official sector" (OSI) among Greece’s creditors (ECB, EU, IMF) remains a key stumbling block in the long-delayed decision on a writedown of Greek debt to be discussed later in the afternoon at a meeting of eurozone finance ministers in Brussels.
"I would like to assume that we can reach final and concluding negotiations today,” Luxembourg's prime minister, Jean-Claude Juncker, who also chairs the Eurogroup meetings, said as he arrived in the Belgian capital.
“The Greek side has fulfilled many preparatory efforts we had demanded. I am of the opinion that today we have to deliver, because we don't have any more time to waste.”
Juncker was referring to an approaching deadline of March 20 when a 14.4bn euro bond falls due for redemption. Greece risks a disorderly default if a second EU-IMF bailout loan and a debt writedown are not completed by then to finance the bond rollover.
The 17 Eurogroup member countries appear to have settled all issues related to the private sector involvement (PSI) part of the deal, originally agreed at the EU summit on October 27, but remain divided about the scale and scope of their own contribution to the haircut of Greek bonds by 50 percent of their face value.
"There are still questions as to how much the public sector can contribute and how we will handle the issue of private creditors in detail, and we will have to talk about the total volume of the second programme. We can't exceed 130bn euros," Juncker noted.
An unnamed finance ministry official was quoted as saying by Reuters that "questions remained over the transfer to Greece of profits accrued by the European Central Bank on its Greek government bond portfolio".
ECB bond hangover
The pending matter revolves around 65bn euros worth of Greek bonds held by the Frankfurt-based European Central Bank and the national central banks linked to the ECB eurosystem.
The bonds have been purchased in the secondary market at a discount of around 20 percent.
But the ECB has staunchly refused to submit them to the same haircut as the one planned for the PSI writedown on privately held Greek bonds, even though they were purchased by the central bank’s money creation power (quantitative easing).
The ECB has proposed instead a complicated process of swapping its Greek bondholdings at face value with new Greek bonds financed by the EFSF eurozone bailout fund. The ECB would then transfer the 20 percent “profits” it has made on the purchase of the original bonds to its “shareholders”, namely the 17 eurozone governments.
The latter would then decide whether to transfer to Greece the ECB profits of around 15bn euros, as part of the new bailout loan of at least 130bn euros agreed in October.
Costly bailout
The problem with this cumbersome process is that it would raise the cost of financing the ECB swaps to exorbitant levels of nearly 100bn euros, allowing virtually no funds to go towards financing Greek interest payments or budget support in the 2012-2014 period.
To make up the funding gap, the “official sector” is therefore forced to push for a deeper haircut on the PSI side of the bargain, as the finance ministry official suggested.
"The possibility of a deeper involvement of the private sector in the PSI debt swap, mainly through the management of accrued debt interest, continues to be discussed," the official was quoted as saying.
Accrued debt interest in 2012 is payable prior to the PSI bond swap and amounts to about 5.7bn euros that must also be financed by the EFSF.
http://www.athensnews.gr/portal/11/53468