Draghi’s sleight of hand saves ECB from losses

Financial Times
February 21, 2012

Eurozone finance ministers trying to plug holes in Greece’s second bail-out plan turned to the European Central Bank in the early hours on Tuesday morning.

But while agreeing to forgo up to €5bn in potential profits on its Greek bonds, the euro’s monetary guardian has protected itself against forced losses on its bond holdings and will not make direct payments to Athens.

Ahead of the meeting Mario Draghi, president, had ruled out taking losses on its portfolio. It was acquired for an estimated €40bn under a “securities markets programme”, launched by Jean-Claude Trichet, his predecessor in May 2010, when the eurozone debt crisis first threatened to blow out of control. The ECB, he said, could not embark on “monetary financing”, or central bank funding of governments, which is banned under European law.

With Mr Draghi’s agreement, however, finance ministers were able to earmark €5bn in profits the ECB expects to earn on its Greek bonds over three years. Once distributed, governments will use the funds as compensation if their own financing costs are higher than the lower interest rate they agreed to charge on official loans to Greece.

More