ECB To Swap Greek Bonds to Avoid Loss

Several euro-zone officials told to press, that The European Central Bank (ECB) plans to swap its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring.

The ECB holds around 50 billion euros of Greek bonds as a result of its Securities Markets Program that started in May 2010, aimed at restoring the transmission of monetary policy on financial markets distorted by the sovereign debt crisis.

Greece is planning to introduce collective-action-clauses (CACs ) into its bond contracts to allow a majority of its bondholders to force all holders into a new bond exchange. CACs typically make all bondholders subject to losing part of their capital in a retrospective action that does not require the assent of all lenders. To ensure that the ECBs bonds aren’t forced into this exchange, it plans to swap its existing bonds for new Greek bonds that won’t contain these clauses.

An exemption from collective action clauses, or CACs, would mean the ECB would not have to participate, should the Greek government impose involuntary losses on bondholders. That may occur if not enough private creditors agree to a voluntary swap.

If this ECB plan goes ahead, it may appear that the ECB is receiving preferential treatment. If the ECB is in the market buying bonds, with the subordination of investors to the central bank, the actual losses will be distributed over a smaller pool of bonds, giving investors even larger losses.

It would raise questions about whether the ECB is senior to private-sector bondholders, not only in the case of Greek debt, but also regarding the debt of other euro-zone nations that the ECB may be purchasing.

The ECB within its Securities Markets Program has also bought bonds including those of Spain, Portugal and Italy totalling 219.5 billion euros.

Greece will submit legislation to parliament on Feb. 21 to allow the use of CACs in a debt-swap process that will start on Feb. 22 and conclude on March 9.

In the meantime, according to some sources, bond swaps could already take place over the weekend, and the new bonds the ECB would receive, would have the same terms as the original ones.

Sources: Reuters and Bloomberg

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