With the bailout of Greece in major doubt, an actual lasting “solution” to the crisis seems as far away as ever.
But anyway, here’s how Goldman’s Francesco Garzarelli would deal with the situation.
If this is the ‘end game’, we continue to believe that secondary market purchases of Greek debt by a joint European vehicle (a policy option that has been rejected in March, but could be dusted off) would achieve several objectives, particularly now that Greek bonds trade at distressed levels (the average weighted price of those maturing between 2014 and 2015 is in the low 60s, while that of bonds maturing after 2016 is around 50c). First, if financial institutions were ‘voluntarily’ asked to sell bonds maturing in the next few years, this would satisfy the political demand for private-sector participation (pain would fall proportionally more on those institutions that have provisioned less for losses). Second, the money saved relative to a notional-for-notional replacement of bonds with loans could be used to recapitalize the Greek banks, and offer the European taxpayer some buffer in the event of a ‘haircut’ down the line. And third, if the purchases involved the portfolio held by the ECB, this would enhance the credit quality of the balance sheet of the central bank.
So the key thing to realise here is that there is already a joint European fund — the EFSF — but it doesn’t buy bonds directly. It’s a bailout fund. A fund that could actually place a bid under the market could rectify issues of bondholder haircuts.
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