ANFAir play

When you read that foot-dragging might leave Greece short of 2 billion euros, you probably instantly think that those pesky Greeks are up to no good, again. Well, not this time. The shortfall lies with Greece’s eurozone creditors as national central banks (NCBs) did not roll over their Greek debt, the so-called ANFA holdings.

This special relationship between Greece and the central banks across the eurozone started early in 2012, prior to the conclusion of the PSI. Then, a law passed through Greek Parliament converted the ECB and NCBs Greek debt holdings into new paper with identical coupons and maturities, which was subsequently excluded from the PSI. A clause was inserted stipulating that the bonds eligible for the debt exchange were those issued before the end of 2011. It was that simple.

A product of this arrangement was the Eurogroup decision of 21 February 2012, according to which the ECB and the NCBs would pass on any profit related to their holdings of Greek debt with an expected reduction to Greece’s public debt of 1.8% of GDP by 2020. This would lower Greece’s financing needs by approximately 1.8 billion euros for the duration of the second programme, which was being devised at the time. These holdings generate income from two sources, first from the coupon payments and secondly from the difference between the discounted purchase price and the face value of the bond. The income distribution path is that the ECB passes on its profits to the national central banks based on a determined capital allocation key and the NCBs pass on the ECB’s distributed profits and their own to their respective governments.

These ANFA profits were expected to be 600 million in Q2 2012, 700 million in Q2 2013 and 500 million in Q2 2014, which adds up to the 1.8 billion euros in the estimated total mentioned earlier.

March 2012

As Greece’s bailout program went off track again, towards the end of 2012 additional financing was required to plug the holes while at the same time no one was willing to put up any more money. With the same “financial envelope,” the Europeans and the IMF started looking for alternative sources to reduce the programme’s financing.

One of them was the roll-over in equal terms of the Greek debt holdings held by European central banks, not the ECB. If fully implemented, this would reduce Greece’s financing needs by 3.7 billion euros in 2013-2014 and an additional 1.9 billion euros in 2015-2016. It is explicitly stated in the documentation that the numbers are tentative and are subject to NCB approval.

December 2012

This is reflected in the programme’s financing table where maturities of bonds are reduced and there is a 2.7 billion financing source in Q2 2013 and a 2.4 billion in Q2 2014.

March 2012

December 2012

December 2012

In reality, those amounts were as tentative as they could be since on May 20 this year 5.6 billion euros of Greek bonds that were excluded from the PSI matured and it was just under 2 billion of this maturity that the troika had hoped to have been rolled over. Instead, those bonds were paid in full.

Interestingly enough, although the evident refusal of European central banks to accommodate the political decision is reflected in the programme’s official documentation of May this year – as the values of the maturities schedule in the disbursement table go back to where they were in the February 2012 documentation – the amounts of ANFA and SMP profits remain unchanged at 2.7 and 2.5 billion for 2013 and 2014. It naturally raises the question how this source of financing in 2013 will materialize when the maturity schedule for the rest of the year remains unchanged and roll over of these maturities does not seem be making up for this shortfall.

December 2012

May 2013

FT’s Brussels editor Peter Spiegel has done here another excellent forensic investigation on Greece’s bailout program to highlight that it is steadily running out of funds. However, the issue of eurozone central banks’ refusal to roll over their Greek debt holdings has wider implication than just a financing gap. It also reflects the overall perception of and attitude towards Greece and the environment in which the country, with all its faults, has to tackle the biggest crisis it has faced for decades.

Eurozone central bankers are apparently concerned that such a roll over would constitute monetary financing when in fact the ECB, with the support of Germany, turned a blind eye to a major – in strict terms – monetary financing operation when Ireland – and rightly so – converted the promissory notes to its central bank into bonds with maturities between 27 and 40 years, with the intention of improving the country’s fiscal burden – promissory notes repayments were the equivalent of 2% of GDP annually – and debt profile and give it a chance to successfully exit its bailout programme (Ireland’s deal is well explained here by Karl Whelan).

In Ireland’s case, it appears the eurozone was in desperate need of a success story after the economy of the previous poster child, Portugal, started feeling the pain of the austerity policies, leading to Lisbon being granted one target revision after the other and repeated extensions to reduce its deficit.

The contrast with the Irish case also raises questions over the effectiveness, reliability and decision-making process of European politicians and officials. They increasingly give the impression that as Greece’s programme drifts off course, measures are put on paper to make numbers add up and the debt sustainability seem credible, only to be proved wrong a few months later or for it to turn out that they have not secured the necessary prior concessions, as in the case of the central banks and the Greek debt roll over.

With some tough decisions for Greece’s financing and debt sustainability expected this autumn, the country sees some alarming precedents being set.

@YiannisMouzakis