Wall Street Journal
January 24, 2012
The European Central Bank could help solve Greece's debt puzzle. Talks with private bondholders on a "voluntary" deal to cut €100 billion ($129.3 billion) off Greece's debt have faltered, with banks arguing they have made the best offer they possibly can. It is increasingly likely that euro-zone governments will need to take a loss, too, to make Greece's debt profile look sustainable. A move to restructure the ECB's estimated €45 billion-€50 billion holding of Greek bonds could unlock the process.
The ECB isn't involved in the Greek private-sector debt-restructuring process, which covers some €200 billion of debt, as it is an official body. It bought bonds to try to stabilize the market rather than as an investment. It has powerful arguments for why it needs to avoid losses. First, it would make it impossible for the ECB to accept Greek paper as collateral for lending to banks, cutting the Greek banking system adrift and effectively ejecting Greece from the euro—a potential disaster scenario. Second, it would put an end to any further ECB bond purchases, removing a key tool that has proved effective in damping the crisis in Spain and Italy.
But if the ECB insists its bonds are paid off in full, that could strengthen the hand of other investors in holding out against a voluntary deal. Greece might then have to introduce and use so-called collective-action clauses in the bonds to force holdouts to participate. In that case, it is difficult to see how the ECB could extricate itself. While creditors with differing claims can be treated separately, creditors holding the same bond should be treated equally.
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