ECB to swap Greek bonds to avoid forced losses -sources

The national central banks in the euro zone are set to exchange their holdings of Greek bonds into new bonds in the run up to a private sector debt deal to avoid taking any forced losses, euro zone sources said on Thursday.

The euro zone is putting the finishing touches to a second bailout deal for Greece for finance ministers' approval on Monday, paving the way for a debt swap with its private creditors needed to avoid a ruinous default in March.

The deal, which aims to halve in nominal terms what Greece owes to investors, slashing its debts by 100 billion euros, is set to include a legal requirement for bondholders to accept losses. This would have put the ECB in a tricky position, leaving it open to claims it was financing governments.

Two euro zone sources said that to avoid the problem, the ECB would swap its bonds for new ones ahead of the private sector debt swap, which would allow it to stay out of the debt deal.

Sources said the process could start over the weekend, with one adding that the move was a technicality and that the new bonds would have the same terms as the original ones.

The ECB declined to comment.

According to euro zone sources, the ECB owns roughly 50 billion euros ($65 billion) worth of Greek bonds as a result of a controversial emergency support program started in May 2010.

It bought the bonds at a discount, however, paying just under 40 billion euros. This means it is sitting on a paper profit of 10-15 billion euros, money which it has made clear could be directed back to Greece. ($1 = 0.7668 euros)

[Source: Reuters, Frankfurt, 16Feb12]

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