February 15, 2012

ECB Plans to Surrender Greek Bond Profits

Eurozone member states would pass funds on to Greece

The European Central Bank said that it does not wish to profit from its holdings of Greek sovereign bonds, and will permit eurozone member states to pass on those profits to Greece to aid in that country's debt crisis.

Reuters reported Wednesday that the president of the ECB, Mario Draghi, originally proposed on Thursday that profits from the body's holdings of Greek sovereign bonds be relinquished to the central banks of eurozone states, which could then apply those funds to the Greek debt crisis.

ECB officials Joerg Asmussen and Luc Coene supported the idea, and discussions are under way to determine how to book such profits up front so that they can be provided to Greece as an early lump sum.

While that news may be good, it comes as eurozone finance ministers have abandoned plans to meet with Greek officials face to face on Wednesday to discuss plans for a second bailout. Ministers have said that Greek party leaders have not provided a sufficient commitment to reform measures demanded by the troika–the ECB, the European Commission and the International Monetary Fund.

If Greece fails to convince leaders to extend additional funds by March 20, it will default–an event that could be disastrous for far more countries than itself. The ECB has been pressured by European leaders to be more active in finding a way to help Greece avoid that event, but has resisted. The surrender of profits from Greek bonds presents a way for the ECB to participate while still avoiding actions it does not want to take.

Coene, Belgium's central bank chief, was quoted saying, "What we have agreed in the eurosystem is that we indeed do not wish to make a profit from the transactions with Greece and, when the profit from past years is distributed, each government will determine what proportion is due to Greece. It is for the governments to decide what to do."

Asmussen had said the ECB could not contribute directly, but was quoted saying, "If there should be a profit, we will pass it onto the national central banks, as foreseen by our statutes. Then the member states can decide to use this as a contribution to finance the Greek program."

In order for the ECB to come up with such a lump sum, instead of funds that would trickle in as bonds mature, it will have to sell the bonds to the European Financial Stability Facility at full face value. Then it can book the profits and distribute them to member states for eventual distribution to Greece. It is estimated that such an action would bring in 10 billion to 15 billion euros ($13.148 billion to $19.725 billion).

Even ECB policymaker Jens Weidmann, head of Germany's Bundesbank, spoke in support of such a plan and was in fact the first to do so in an interview with the German newspaper Handelsblatt, saying, "If there is a willingness from governments to buy these bonds off us then we definitely won't refuse to talk." However, he added that there was no indication that governments were willing to participate.

Reprints Discuss this story
This is where the comments go.