German rumours that Greece may buy bonds back at discount

BERLIN WAS abuzz yesterday with speculation that, to avert default, Greece will be allowed buy back its sovereign bonds on “favourable” terms from euro zone rescue facility, the European Financial Stability Facility (EFSF).

Germany's finance ministry spokesman dismissed as speculation reports to that effect in Die Zeit. But senior officials in Brussels gave credence to reports that tentative discussions were under way, saying "there's no smoke without fire". An unnamed source told the Reuters news agency that German officials had "begun to think about the unthinkable".

A “Plan B” for Greece is a discussion the European Central Bank is anxious to avoid. Memories are still fresh of the acute financial market turmoil that hit Irish bailout talks when talk surfaced of haircuts for senior bondholders.

The Greek “Plan B” as reported by several German newspapers would see the EFSF sell back bonds at a discount that reflects the bonds’ market value, about 20 per cent below their issue price.

To buy back these bonds, Athens would be granted more money from the EFSF fund.

This strategy could force Greek bond owners, mostly banks and insurance companies, to decide whether to take a financial loss now or hold on to the bonds and hope for a better return in the future.

A German finance ministry spokesman denied there was such a strategy, insisting that forcing private investors to accept a so-called “haircut” on investments was not planned before 2013.

Concern is growing in EU capitals that last May’s Greek bailout plan is not running according to plan and that Athens may still be in financial difficulty after implementing its rigid austerity programme.

Separately yesterday, EU Economic and Monetary Affairs Commissioner, Olli Rehn, told Finnish television that the EU’s rescue fund must must be made more effective because the markets doubt the group’s ability to act, but said raising its size is not a priority.

“It is important that EFSF’s efficiency can be boosted,” Mr Rehn said.