Friday, January 21, 2011

How Euro-Zone Strugglers Can Say 'Buy' to Debt

by Stephen Fidler

Wall Street Journal

January 21, 2011

The debate about boosting the effectiveness of the euro zone's main government bailout fund now appears likely to extend well into March. Germany, the fund's paymaster-in-chief, seems willing to consider new ideas for the fund, but at a price—tougher reforms from beneficiary governments aimed at improving the long-term health of their struggling economies.

The idea that gathered most attention this week has been the suggestion that the fund, the European Financial Stability Facility, could lend money to troubled governments to help them buy back their own bonds.

Because of worries about possible future defaults or restructurings, most bonds of Greece, Ireland and Portugal are trading at deep discounts to their face value. The idea would be to harvest those discounts for the benefit of the governments, which would extinguish the bonds and thereby lower their debt and interest payment burdens.

This proposal has gained ground over a related idea that the EFSF should buy the bonds itself. In an interview with Dow Jones Newswires that appears also to reflect the views of Germany, Dutch Finance Minister Jan Kees de Jager said this week that the direct buybacks appear to be in violation of EU treaties. "So I don't see it as a viable option."


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