Euro Zone Could Buy Back Strapped Countries' Debt

(Reuters) - European leaders should not shy away from a proposal to buy back the bonds of troubled euro member states but should not rely too much on rich countries, Eurogroup Chief Jean-Claude Juncker said.

"It would be wrong to create taboos but we cannot overstretch the strong countries," Juncker said in an interview with German magazine Der Spiegel seen by Reuters on Saturday ahead of publication.

A source told Reuters on Thursday that euro zone ministers are considering whether the bloc's rescue fund could buy back bonds of debt-ridden states, a plan Portugal said it supported.

Der Spiegel magazine also reported in an unsourced report that the idea of a buy-back, which it said was first raised by the European rescue fund's chief Klaus Regling, had been greeted with sympathy by euro zone finance ministers this week.

Without citing any sources, Der Spiegel said Regling's suggestion stood good chances of becoming reality.

"The measure has good prospects of being signed off as part of a comprehensive package to stabilize the euro zone at the European Council in March," it said in a pre-publication release.

It also cited an unnamed high-ranking German finance ministry source as saying this was a good idea, running counter to official German denials this week.

"I wouldn't know of anyone in the Finance Ministry who would have said that," a spokesman for the ministry told Reuters, declining to comment on the Der Spiegel report.

Greece and Germany have insisted Greece, the first to succumb in the currency bloc's debt crisis, needed no help with debt repayments.

A spokesman for EFSF's Regling declined comment but referred to an interview earlier this week in which he said Greece did not need a restructuring of debt, while the Greek finance ministry again denied there have been any discussions on restructuring.

RESCHEDULE AID ONLY

Greece wants to stretch out repayment of the emergency funding it is getting from the IMF and its euro zone peers but is not in talks to restructure its debt, its deputy finance minister reiterated on Friday.

Under the proposal being discussed, the EFSF would be able to conduct buy-back operations of bonds of a distressed country, which could help stabilize its debt market, Reuters sources have said.

For this to be feasible, the fund would need to be beefed up to be able to actually lend out its full headline value of 440 billion euros ($375 billion), a move Juncker backed in his interview with Der Spiegel.

Currently only about 225 billion euros are effectively available because of the need to secure a triple-A credit rating.

Der Spiegel said bondholders would be paid, for example, a five percentage point premium for the bonds that Greece would buy back from them. The EFSF would secure this deal, the acceptance of which would be voluntary for creditors, the magazine said.

(Reporting by Annika Breidthardt; Additional reporting by Michael Nienaber in Berlin, Ilona Wissenbach in Brussels and Renee Maltezou in Athens; Editing by Toby Chopra)

Copyright 2010 Thomson Reuters. Click for Restrictions.

Comments

[parags20]

12:36 AM on 02/21/2011

The banks should be forced to buy back the debt that never should have been shifted to tax-paying citizens in the first place.
If a bank gets in over its head, the entire banking operation should be nationalized; it’s morally wrong to nationalize only the bank’s debt.
http://www.financemetrics.com/european-debt-crisis-means-continent-is-on-the-periphery/

[costellowriter]

02:06 AM on 01/24/2011

So now, thanks to a private corporation printing their currency, and IMF loans, the tax payers will have to pay back the bond holders, AND then buy back the debts at inflated prices.

[Rachael Marie]

03:09 AM on 01/23/2011

Sovereign countries should never allow private central and commercial banks to issue the currency of their nations. The results of doing so are predictable 100% of the time.

You'd think with the Constitution of the United States explicitly stating that the Federal Government has the sole right to produce and regulate the value of the Nation's money supply we wouldn't have fallen to the bankers game.......but you'd be wrong.

[costellowriter]

02:07 AM on 01/24/2011

They didn't put it in the Constitution for no reason. Yet America sleeps.

[2252]

09:56 PM on 01/22/2011

Buying back securities, is a financial decision - when sufficient investment funds are available - should be based on the expected yields compared to any other options for those invest able funds.
There may be an added dividend of expressing confidence in the management of its affairs by buying back one's own securities that may boost other investors confidence and morale. This is preferable to keeping those funds un-invested or invested elsewhere. Euro Zone officials would have scored a victory if they can achieve both of those results and pave the way for the financial sector stability and steer away from the lingering suspicions of systemic problems.

[Michael GE]

09:08 AM on 01/23/2011

As far as I understand, it's about a much more direct approach to get rid of some of Greece's debt by making private investors accept cuts.
Presently, Greek bonds in circulation on the markets are traded at 72 percent of their face value and with interest rates of about 8+ percent. The ESEF (that's the rescue fund backed by the stronger countries) can issue bonds at a 3.5 percent interest rate.
So, the idea is: ESEF offers to buy Greek bonds at - let's say - 80 percent of their face value. Then Greece buys them back. The money to do so (the new Greek debt) Greece is loaned by the ESEF at 3.5 (or 4, or 5) percent interest rate.
So, if Greece had before a debt of 100B for which they had to pay 8 percent interest, after this move, they would have 80B at 3.5 percent.
The drawback: Especially pension funds are considered to have losses by this move and some banks which are still to close to the brink could get into heavy weather again.
For investors, it's a gamble: Accept these conditions or risk facing greater losses when (inevidently) Greek debt is restructured by a haircut.
That is what I like about the idea: If they can make it work, it means finally politics plays the investment markets to their favor, making investors accepting to pay their part.

[Indigo1941]

08:09 PM on 01/22/2011

Lexicon, please!
Is "euro zone" NewSpeak for the EU? and why the change? Are the NewSpeakers indicating that the EU is obsolete? and if so, why not dissolve it?

[Shomali]

09:34 PM on 01/22/2011

euro zone means EU countries that use Euro as their currency. Not all EU members such as Britain use Euro as theri currency.

[Indigo1941]

09:20 AM on 01/23/2011

That makes sense. Thank you.

[2252]

09:40 PM on 01/22/2011

"Euro Zone" is not a new speak for the EU. Euro zone is a subset of countries of EU that have accepted Euro as their sole currency. At present there are only 17 such countries. For more info., please follow this link: http://en.wikipedia.org/wiki/Eurozone

[Indigo1941]

09:20 AM on 01/23/2011

I see. Thank you.

[Michael GE]

06:31 PM on 01/22/2011

Well, the essential information is missing here (and btw. here, the media already reported about it a couple of days ago): The idea is to restructure Greek debt. If Greece buys them back now, at about their current net worth (72 percent), they would only have to pay about 80 percent. So, a considerable part of the debt vanishs with a loss for the private sector investors
I hope this plan is as sound as it looks like. About time they figured out something how they can make the "rules of the game" work in our advantage.
Unfortunately, and this could especially be a US concern, especially pension funds are invested in government bonds, so they would have to accept losses.

[costellowriter]

04:47 PM on 01/22/2011

What a joke it all is. The whole system is corrupt and needs to come crashing down.
http://bizcovering.com/investing/gold-silver-in-tomorrows-world/