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Feb. 8, 2012, 5:33 a.m. EST

Greek bailout hopes rise amid ECB concession

ECB ready to exchange Greek bonds at below face value: WSJ

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By William L. Watts, MarketWatch

FRANKFURT (MarketWatch) — Talks between Greece and international creditors over a second bailout stretched past yet another deadline, but appeared to be moving toward a conclusion Wednesday after the European Central Bank reportedly agreed to exchange Greek government bonds at less than face value in an effort to further reduce the nation’s debt load.

The ECB will exchange government bonds bought in the secondary market last year at a price below face value once debt-restructuring talks with private creditors are successfully concluded, The Wall Street Journal reported, citing unnamed people briefed on the talks.

Under the plan, the ECB would exchange its Greek bonds for bonds issued by the European Financial Stability Facility, the euro zone’s temporary rescue fund. The EFSF would then return the bonds to Greece, which would repay the EFSF at the price which the fund purchased the bonds from the ECB, the report said.

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The ECB had previously resisted suggestions it should take a hit on its Greek bond holdings, insisting it had made the purchases in an effort to overcome dysfunctional markets that were blocking the transmission of its monetary-policy maneuvers.

The move would cut Greece’s debt load by around €11 billion. The ECB, which spent an estimated 40 billion euros buying discounted Greek government debt, wouldn’t take a loss on the transaction but would forego some if not all of the profit it would earn by holding its Greek debt to term.

Economists said the concession may help smooth the path to an agreement by Greek party leaders on a deal with Greece’s private-sector creditors and a crucial €130 billion bailout from the country’s euro-zone partners and the International Monetary Fund.

Greek Prime Minister Lucas Papademos is set to meet with the leaders of the three parties that support his interim unity government on Wednesday with the aim of finalizing an agreement on the bailout. Without the aid, Greece is expected to default by mid-March when it faces a €14.5 billion bond redemption.

The meeting, which was initially set to take place on Monday, was delayed a second time on Tuesday as the government continued to haggle with international creditors over details of further cutbacks.

Strategists note that time is running short to implement the rescue plan and the planned bond swap with Greece’s private creditors in time for Athens to make its March 20 bond repayment.

“Agreement here would pave the way for a euro group meeting [of euro-zone finance ministers] later in the week, with the debt exchange to get under way next week. Any further delay, meanwhile, would leave time exceptionally short to enact the debt exchange in time for the 20 March redemption that would otherwise be due,” said Grant Lewis, economist at Daiwa Capital Markets.

The euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.0103%  took the delays in stride, rising 0.1% versus the dollar to change hands at $1.3267 after trading at its highest level since mid-December.

“The ability of the euro to turn a blind eye to the repeated failures of Greece to commit to the terms of its bailout is firm evidence of the reduction in risk aversion since the end of last year,” said Jane Foley, senior currency strategist at Rabobank International.

Greek party leaders have resisted calls for a further round of cutbacks. The nation’s two biggest unions on Tuesday staged a daylong strike to protest demands for further austerity measures.

Greece is entering a fifth year of recession and has seen its economy shrink by around 12% since 2008. Greece’s public debt stood at nearly 160% of gross domestic product in 2011.

Protesters near the Greek parliament building in Athens burned a German flag, news reports said. German-led demands for austerity have stirred resentment in Greece.

Meanwhile, German Chancellor Angela Merkel moved to rule out Greece’s exit from the euro.

“I don’t want Greece to leave the euro and therefore the question doesn’t arise,” Merkel said at an event with students in Berlin late Tuesday, according to Bloomberg. “It doesn’t require a political response because it’s not something that’s on our minds.”

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William L. Watts is a reporter for MarketWatch in Frankfurt.

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