Euro-zone countries are considering a proposal that would see Greece cut its debt by buying back bonds held by private creditors at a discount, says Wall Street Journal.
According to the report, the exercise, one of a number of options being studied, could persuade the International Monetary Fund to sign off on a loan payment desperately needed by the debt-laden country and keep Greece΄s bailout on track for the medium term, two officials with direct knowledge of the discussions said Thursday.
One of the officials said the plan, originally floated in the middle of last year but dropped, was being promoted by the European Central Bank. The ECB declined to comment.
The bonds would be bought at a discount from private bondholders by the Greek government, but it could then deduct 100% of their face value from its total debt, making its debt appear more sustainable compared with the size of its economy.
“It involves a voluntary exercise. The theory that if those holders want to exit Greece now you agree on a premium and Greece writes off the remainder [of the face value],” one of the officials familiar with the plan said.
The plan faces a number of obstacles; not least that Greece would need access to many billions of euros for the buyback. German opposition to advancing funds to Greece was a factor behind the similar proposal in the middle of 2011 being dropped. That opposition has since become stronger.Also disclosure of the plan would cause the bonds to rise in price making the exercise less effective than it appears on paper today. The official said: “The problem is that those bonds will shoot up in the market if this becomes the preferred option.”
The bonds that could be bought back were issued to private creditors after they agreed to take a 53.5% loss on the face value of their bonds earlier this year. Those bonds have a face value of €63 billion ($83 billion) but currently trade at a steep discount.
(source: WSJ, Capital)
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