An Open question - Can and should the EFSF assume the Greek Bond Postion of the ECB

Pro side for the EFSF assuming ECB Greek bond position.....

http://www.creditslips.org/creditslips/2012/01/the-crisis-of-fake-constraints-greek-denouement-eupdate.html#more

From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue.

Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

There seems to be a simple fix: swap the Greek bonds held by the ECB for bonds of the European Financial Stability Facility at a price that does not cause ECB losses. Then have the EFSF go into the exchange and vote the bonds if it needs to. At a minimum, this captures for Greece the discount at which the ECB bought its bonds. If Europe is unwilling to see the EFSF take a loss from the ECB's purchase price, Greece could conceivably make up the difference with a special bond issue for the EFSF on terms that reflect the specialness of the vehicle and the circumstances.

Freshly downgraded, EFSF debt is not exactly in high demand. An ECB swap would not require it to raise money in the markets. Having a fiscal vehicle take the risk (if not the loss) from a Greek restructuring is more honest and institutionally sensible than leaving it with the monetary authority. At a minimum, it would stop the chatter about monetizing the debt--without the optics of a big new package for Greece.

As precedent, the operation might be healthy for all involved. An EFSF swap would signal the parameters for any future deals involving ECB-held debt: on the one hand, it is not fully preferred, on the other hand, there is a built-in limit to the haircut. There is even a whiff of harnessing the market. (I once heard a story that Latin American debt managers in pre-Brady days had made up "Capture the Discount" t-shirts.)

More broadly there is a decent argument that the EFSF is sui generis--an ad hoc crisis vehicle that can do what no one else can be expected to do. For example, it has never been encumbered by feckless claims of preferred creditor status, unlike the new treaty-based European Stability Mechanism, due out this summer. This is as close as it gets to a credible "just this once".

Con Argument .....  To get to my Con argument ( set forth in parenthesis below ) , let's examine the structure of the EFSF - what is its mission ? From Wikipedia 

Function of the EFSF

The mandate of the EFSF is to "safeguard financial stability in Europe by providing financial assistance" to euro area states. 

^{( My query - where does buying at ECB  cost basis fall within the mandate of providing financial assistance to euro area states ? Moreover , the EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise funds needed to rescue eurozone countries - again , where does buying ECB bonds at its cost basis fall within the function  )} 

The EFSF can issue bonds or other debt instruments on the market with the support of the German Debt Management Office to raise the funds needed to provide loans toeurozone countries in financial troubles, recapitalize banks or buy sovereign debt. Emissions of bonds would be backed by guarantees given by the euro area member states in proportion to their share in the paid-up capital of the European Central Bank (ECB).

( Let's talk about bond issuance - did the EFSF provide warnings to buyers of its debt ? ) For Example consider :  January 5, 2012  - European Financial Stability Facility today placed a €3 billion 3-year benchmark bond maturing on 4 February 2015. The proceeds will be used in conjunction with the financial assistance programmes for Republic of Ireland and Republic of Portugal. The issuance spread at reoffer was fixed at mid swap plus 40 basis points. This implies a reoffer yield for investors of 1.770 %. ( did these buyers know their proceeds would bailout a Central Bank terrified of facing a 50-70 percent haircut - which would represent losses for the ECB . Depending on whether a 50 or 70 percent haircut applies , the ECB losses range from 110-20 billion euros on the approximate 50 billion euros  in Greek bonds . Apart from the breach of their mandate and issuance function , where might EFSF bonds price after a ECCB Debt swap - especially considering the rest of the PIIGS in the wings waiting for their debt close up ? )

LENDING

The Facility can only act after a support request is made by a euro area member state and a country programme has been negotiated with the European Commission and the IMF and after such a programme has been unanimously accepted by the Eurogroup (euro area finance ministers) and a memorandum of understanding is signed. This would only occur when the country is unable to borrow on markets at acceptable rates.

If there is a request from a euro area member state for financial assistance, it will take three to four weeks to draw up a support programme including sending experts from the Commission, the IMF and the ECB to the country in difficulty. Once the Eurogroup have approved the country programme, the EFSF would need several working days to raise the necessary funds and disburse the loan.

( Query - where does Buying Greek debt fall within their lending function as described above - the ECB is not a euro area member state,

 the ECB has not negotiated a country programme with the EC and IMF - the EFSF cannot bail it out . )

 http://www.efsf.europa.eu/about/index.htm

http://www.efsf.europa.eu/attachments/faq_en.pdf

 (  Here is the EFSF  information from their website - Am I off base here ? )