Such an action would put the onus on national governments to ensure that Greek banks would be able to find liquidity to meet their day-to-day funding needs if they’re unable to pledge Greek debt as collateral for ECB funding, Trichet said.
“If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral,” Trichet said. “The governments would then have to step in themselves to put things right. That would then be their duty.”
No ECB intervention
The ECB on Monday said it settled no bond purchases through its Securities Market Program last week, showing that it remained on the sidelines despite market rumors that it had intervened to stem a sharp rise in Italian bond yields last week.
Stress tests don't pass with markets
European bank stocks, peripheral bonds and the euro itself have still been hammered after a second round of bank stress tests.
The lack of action is further evidence “that the ECB is not willing to budge in the controversy with euro-zone governments on how to proceed in the sovereign-debt crisis,” said Carsten Brzeski, senior economist at ING Bank.
Germany has insisted that further aid for Greece can’t be implemented without the private sector sharing in the burden.
And recent comments indicate that Germany is likely to get its way, Marcussen said.
In a statement on Sunday, a spokesman for the Institute of International Finance, an organization representing global banks, said discussions late last week in Rome between private investors in Greek bonds and public-sector officials continued to explore several options related to Greece’s financing needs and the sustainability of its debt burden.
The talks made progress and will continue, the spokesman said.
One particular option
Strategists on Monday increasingly focused on an option that’s previously met opposition from Germany: a buyback of Greek government debt financed by the European Financial Stability Facility, the bailout mechanism put in place by euro-zone countries after last year’s Greek bailout.
“Although there are still likely to be significant obstacles to its implementation ... the solution most likely to be sought for the Greek bailout will be one based on buybacks of outstanding bonds at their present distressed prices, belatedly recognizing that Greece’s problem is one of solvency and not just liquidity,” wrote Chris Scicluna, economist at Daiwa Capital Markets in London.
Bond buybacks have the “major advantage” of not being seen as a credit event, which would trigger payments on credit-default swaps, and are also unlikely to see Greek debt downgraded to selective default by the ratings firms, Marcussen said.
The big question is whether the buybacks would be sufficiently below the par value of the bonds to help reduce Greece’s debt burden and impose a big enough share of the burden of a new bailout on private bondholders, she said.
Scicluna said it would also remain to be seen whether the confirmation of haircuts for private-sector bondholders would contain contagion around the periphery or merely raise expectations for similar action elsewhere.
At the other end of the spectrum of options, bond holders could be forced to swap existing Greek debt while taking write-downs on their holdings, Marcussen said.
Such a move would go a long way toward slashing Greece’s debt burden, but would run the risk of triggering “wildfire contagion” through the euro zone as holders of other peripheral bonds head for the exits, she said.
