12.10.12

Draghi Making a Big Mistake on Greek Bonds


At last week’s press conference, Mario Draghi made a comment about Greek bonds that has received relative little attention. However, the comment completely undermines a crucial feature of the ECB’s new plan to save the euro.

This key feature of the Outright Monetary Transactions (OMT) plan is that bonds purchased by the Eurosystem will rank equally with those owned by private investors. The announcement of the OMT program stated:

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.
However, when asked last week about whether the ECB would be willing to restructure its holdings of Greek bonds, Draghi responded that this would “qualify as monetary financing”, meaning it would be a legal violation of the ECB’s prohibition from financing euro area governments.

The ECB’s position on its holdings of sovereign debt is extremely hard to understand. When ECB originally purchased bonds under its Securities Market Program (SMP) it purchased standard bonds (generally with pari passu clauses) and these purchases entitled the ECB to no special treatment.
It was fully understood by everyone that the ECB was taking on credit risk when these bonds were purchased. But when Greece organised a restructuring of its debt earlier this year, the ECB refused to co-operate in restructuring its €56 billion in Greek bonds.
Now, the ECB says that it accepts the same treatment as other bondholders while at the same time asserting that having its bonds restructured is illegal.
The purpose of the supposed change of policy on equal treatment was to assure investors that if a debt restructuring took place, the losses would not fall solely on the private bond owners.  Without this assurance, large-scale ECB bond purchases could scare away private investors altogether.  Now, the ECB says that if a bond restructuring occurs—the only time when the equal treatment clause matters—they can’t participate.
Perhaps the ECB’s lawyers believe it is illegal to restructure their Greek bonds but not their Italian or Spanish ones.  If this is the ECB position, then they should explain its legal basis.  Otherwise, investors in Spanish and Italian bonds have every reason to be nervous about ECB bond purchases.
The ECB’s position on its Greek bondholdings also inflicts further damage on the ailing Greek economy.  Despite the debt restructuring that took place earlier this year, Greece is still laboring under a completely unsustainable debt burden, though most of it is now owed to official lenders.
The ECB owns about one-fifth of Greece’s public debt and the Eurosystem has around €500 billion in capital and reserves to absorb losses (not that the Eurosystem’s solvency should be much of a concern in any case).  In addition to undermining the OMT program, the ECB’s refusal to co-operate makes it more difficult to restore Greek debt to a sustainable path and makes a Greek exit from the euro more likely.
Mario Draghi has shown he is capable of changing positions and making the right decisions when necessary. He should admit the ECB position on Greek bondholdings is a mistake and change a policy that is arbitrary, inconsistent and damaging.


http://www.forbes.com/sites/karlwhelan/2012/10/12/draghi-making-a-big-mistake-on-greek-bonds/

No comments: