European Central Bank Eases Way to Greek Deal




The European Central Bank has made key concessions over its holdings of Greek government bonds, which will contribute to a reduction of the country’s debt burden and smooth the path toward a new bailout for the country, said people briefed on Greece’s debt-restructuring negotiations.


The decision by one of the Greek government’s biggest creditors will narrow a gap in Greece’s finances, helping pave the way for a debt-restructuring agreement with Greece’s private-sector creditors and a new €130 billion ($170 billion) bailout from other euro-zone governments and the International Monetary Fund. But it is still unclear whether Greek politicians, facing public outrage, will accept the tough austerity policies pushed by European authorities and the IMF as the conditions to secure a deal.

The development came while thousands of Greeks protested Tuesday against the threat of yet more spending cuts and tax increases, and as talks continued in Athens on a new bailout deal and debt restructuring between the government and its international creditors.

The ECB has agreed to exchange the government bonds it purchased in the secondary market last year at a price below face value, provided the debt-restructuring talks have a successful outcome. The ECB won’t take a loss on the transaction, but it isn’t clear whether the bank will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit, these people told The Wall Street Journal. News of the agreement was first reported by DJ FX Trader.

The concession appears to be a further sign of the growing pragmatism of the ECB under its new president, Mario Draghi, who took office on Nov. 1. Another signal of this was the ECB offer of three-year funds to banks in December in an effort, which seems to have been successful, to restore shattered confidence in euro-zone banks. With worries about banks lifted, financial-market concern about the currency area’s stricken government-bond markets also eased. The ECB plans another offer of three-year funds to banks later this month.

The ECB bought the bonds at a discount to face value in a vain effort to support the price of Greek bonds. Until now, it has insisted it be repaid the full amount. Its concession means Greece reaps the benefit of the discount, rather than the ECB itself.

Greece’s official creditors have been under pressure to make concessions because the expected deal with private bondholders, which will shave some €100 billion from the government’s debt to private creditors, won’t reduce Greece’s debt sufficiently to satisfy the IMF. The ECB concession could reduce Greece’s debt by as much as €11 billion, officials said—the difference between the price at which the ECB bought the bonds in the secondary market and their face value—although the actual reduction could be smaller if the ECB insists on turning a profit.

An ECB spokesperson declined to comment.

The idea is for the ECB, in effect, to exchange its Greek bonds for bonds of the European Financial Stability Facility, the euro zone’s temporary bailout fund. The EFSF won’t hold the bonds on its balance sheet, but will return the bonds to Greece, and Greece will then agree to repay the EFSF for the price at which the fund bought the bonds from the ECB.

However, the people briefed on the negotiations said another option under discussion—for national central banks of the euro zone, which are estimated to hold in their investment portfolios some €12 billion in Greek bonds, also to take part in the debt-reduction exercise—has been rejected by the ECB. This implies the central banks will insist on being paid in full.