February 7, 2012
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 go toward filling 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 as thousands of Greeks on Tuesday protested against the threat of yet more spending cuts and tax increases, while talks in Athens on a new bailout deal have been pushed back for yet another day.
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 said.
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The Solution to the Greek Crisis must meet a number of tests:
1) It must begin the healing process for Greece. It must define the bottom and create hope for the future.
2) It must create certainty for Greece's creditors
3) It must create certainty for all Euro debt creditors for all PIIGS countries.
4) It must prevent contagion. This requires certainty, certainty, certainty.
5) It must be perceived as fair by the citizens of the debtor and creditor countries.
6) It must be affordable.
The existing bailout plan fails most of these tests. The Euro Cash and Carry Plan meets all of them. see eurocashandcarryplan.blogspot.com
Greece will have zero debt and total responsibility for their own fate. No one else will control their destiny. This is essential. They can start to rationalize, invest, and build knowing that the fruits of their labours will not be used to pay foreign creditors.
Creditors will have certainty and liquidity so there is no risk of contagion and new bond purchasers for Italy, Portugal, Spain know with certainty what the worst case scenario is for their investment. This may be what it takes to get China and America involved. They are guaranteed not to loose their principal so they may be willing to buy PIIGS bonds.
It is much less expensive than the present bailout plan. The next tranche of the Greek bailout is 130 billion Euro. This plan would cost the ECB $17.5 billion per year.
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