PARIS (MNI) – In helping to seal Greece’s second bailout Tuesday,
European Central Bank President Mario Draghi struck a balance between
the need to stabilize the Eurozone by supporting Athens and his vow to
avoid any “legal tricks” in order to do so.

The ECB, according to Barclays Capital estimates, will eventually
distribute to national central banks about E5 billion in profits on the
Greek bonds it purchased under its Securities Markets Program (SMP). The
funds will be remitted to governments and, over time, channelled back to
Greece.

Another E7 billion in coupon payments the ECB stands to earn over
the life of the bonds will be distributed, bringing the total amount of
debt relief coming from the SMP to around E12 billion — or nearly 10%
of the E130 billion rescue package.

Eurozone national central banks will also contribute, with coupon
payments on an estimated E13 billion in Greek debt holdings expected to
find their way back to Athens. This will reduce financing needs during
the second Greek program period by E1.8 billion, the Eurogroup statement
said.

Draghi tipped his hand at the bank’s Feburary 9 news conference
that this kind of deal would be a way for the Eurosystem to participate
in the Greek rescue without violating the ECB charter’s ban on using
monetary policy to finance governments.

“All the talk about the ECB sharing the losses is unfounded,” he
said. “The idea that the ECB could actually give money to the program
would violate the prohibition of monetary financing.”

But “if the ECB redistributes parts of its profit to euro area
member countries (via the euro area national banks) according to its
capital key, that is not monetary financing,” Draghi added.

The ECB steadfastly had refused to be drawn into the PSI
negotiations, with officials arguing that the SMP bonds were bought for
policy reasons — to address dysfunctional markets — and not for
investment. Critics say this rationale stretches a bit thin when
extended to the investment portfolios of national central banks.

The deal struck in Brussels reflected a compromise, however,
between Draghi’s seeming desire to support Athens and the need to
protect the ECB’s independence and the damage to its credibility that
would have resulted from any resort to legal or accounting tricks.

In handing over profits to national governments, the Eurosystem is
simply following standard central bank policy. The Eurogroup statement
takes pains to show that the ECB is not locked into any deal, saying
only that central bank profits and revenues “may be allocated by Member
States to further improving the sustainability of Greece’s public debt.”

But in working closely with Eurozone leaders to help put a package
together, Draghi went further into the kind of late-night dealmaking
than some on the bank’s 23-member governing council would have
preferred.

From a market perspective, the one drawback of the ECB’s stance
over the PSI was that it effectively made the central bank a senior
creditor in European debt markets. As Ireland and Portugal face a return
to the debt markets this year and next, knowing that the Eurosystem will
be exempt from any future restructurings could making enticing foreign
investors back into peripheral debt markets more difficult.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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