July 12th, 2011
Econintersect: European finance ministers Monday (July11) discussed using the EFSF ( European Financial Stability Facility) to buy up Greek debt and cut the country’s overall debt burden. The ministers issued a statement containing the words “enhancing the flexibility and scope” of the EFSF but offered no other words to explain what that might mean. However, banks and investors had called for use of EFSF funds to buy bonds in conjunction with more private sector purchases. Follow up:
Follow up:The biggest problem for the finance ministers is that the EFSF has sufficient resources to save smaller countries such as Greece, Ireland and Portugal but cannot save Spain and Italy. The latter two countries are also considered to have severe debt problems.
From Yahoo News:
Eurozone banks and investment funds have been locked into negotiations on how they can contribute to a new rescue package for Greece — on top of the euro110 billion the country was granted last May. The EU says Greece will need an extra €115 billion to keep it afloat until mid-2014, although some of that money is expected to come from selling state assets.
However, the talks with banks have proven difficult, because the eurozone has said that any private sector involvement would have to be voluntary and because rating agencies have warned that even market-friendly proposals will likely be seen as a partial default by Greece. A default rating could spread panic on financial markets and hurt Greek banks, the biggest holders of Greek bonds.
The buybacks have emerged as a potential bargaining chip the negotiations, because they would lower the weight of Greece's debts and relieve banks and other private investors of risky assets on their balance sheets. Faced with the prospect of a messy default by Greece in the near future, which could leave them with very little money, a buyback below face value may be seen as a better option. They could also prove a boon for hedge funds, which may have bought the bonds at even lower prices.
The outcome of the talks today have moved the discussion at least a little in the direction of proposals by economist Warren Mosler, which he has circulated throughout Europe and discussed in an article at GEI Opinion yesterday.