The unstoppable force…
“If the level of Greece’s privately held debt is not sufficiently renegotiated, then public creditors, holders of Greek debt, will also have to participate in the financial effort,” Lagarde told journalists in Paris.
…meets the maybe-not-as-immovable-as-it-likes-to-think object:
The European Central Bank remains firmly opposed to any restructuring of its Greek bond holdings as the debt was acquired for monetary policy purposes, according to two people familiar with the Governing Council’s stance…
We think the IMF is going to win this one.
A crescendo of pressure has built up on the ECB’s €40bn or so of Greek bonds — remember, it’s the largest single holder — in recent days. The FT’s John Dizard started it at the weekend and was the first to note the shift in tone.
Which is nice to see. We’ve long had an issue — going right back, before the ECB holdings were an issue with anyone else — with the central bank’s claims to be a special creditor. Or almost, it was pretending not to be a creditor at all: the nub of the ECB’s opposition is that a write-down would mean it was monetising Greece’s debt. (Though it’s hard to unpick from the central bank’s general ideological resistance to PSI.) How that squares with buying the stuff in the first place is a mystery perhaps best left to the brain-boxes of Frankfurt.
The flaw in the ECB’s stance is the nature of the debt it’s holding.
Our issue after all was that there is no magic fairy dust in the central bank’s vanilla, off-the-shelf, Greek-law bonds that would impart this special status. While that was completely a pain when it looked like Greece would have to decide how to carve out the ECB from retro-active collection action clauses (it’s a long story — see here), the situation changes when the balance of power has turned against the ECB.
After all, contrast this position with the IMF. The Fund’s an unchallenged preferred creditor. Not only that, but the IMF’s prime directive here is to tie Greece down to a sustainable debt path, one way or the other. It has to meet its exceptional access criteria, which include debt sustainability, especially as we are technically between IMF programmes for Greece (the second will start when PSI is nailed down). If there is no way of meeting the EACs, the IMF pulls the plug but is also first in line to get paid back in the aftermath. The IMF’s ‘pre-commitment’ (if we were regressing to game-theory speak) seems quite powerful. (For the same reason, the IMF has the initiative over private bondholders in the PSI talks in general, for example in the interminable negotiations on the coupon of the restructured Greek bonds.)
By comparison, the ECB looks like it’s stuck in a contradiction: it might well be immovable in its convictions, but the terms of its holdings are not. It looks like there’ll have to be some deal where the ECB disgorges its Greek bonds to some vehicle where a write-down won’t be monetary financing, in short.
Related links:
Greek creditors divided – IFR
IMF delivers harsh truth from Planet Earth – FT
Whose PSI is it anyway? – FT Alphaville