Stephen Fidler at the Wall Street Journal outlines a plan for the European Central Bank to accept less than face value on the Greek bonds it has purchased.
This is a major milestone in the Greek debt debacle. Until now, the ECB has been insisting that there would be no "participation" by the official sector. This position was always a bit nonsensical and self-defeating. If the ECB paid €39 billion for debt with a par value of €50 billion, insisting that it get repaid par amounted to a policy of monetary contraction.
Think about it this way. When the ECB buys bonds, this is essentially a monetary operation. It creates new euros to purchase the bonds, and these are injected into Europe's economy through the bond sellers.
It's more or less quantitative easing. So far the ECB has purchased around €219.2 billion of sovereign debt from the likes of Greece, Portugal, Ireland, Italy and Spain at various discounts.
This monetary injection is neutralized—or, as they say, sterilized—if the ECB is repaid at precisely the amount it paid for the bonds. But if it is repaid more than it paid for the bonds, this is a monetary contraction. The ECB would have "printed" €39 billion to purchase the bonds and then it would unprint €50 billion. Money repaid to the ECB is basically money taken out of circulation, destroyed by the central bankers.
It's still not clear that the ECB understands this very well. There's still talk of the central bankers making a "profit" on the bond purchases. But central banks do not make profits—they simply shrink or expand the quantity of money.
Nonetheless, it is a hopeful sign that the ECB is moving away from insisting on getting repaid at par value.
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