I was unaware of this scheme that can lead to more fiscal transfers in the EU
"Finally, does the EFSF really accomplish much? One of the most ballyhooed PIIGY bank feature is the ability of the EFSF to buy bonds at a discount and lend money to the country to buy them back, thus decreasing the notional owed by that country. Letâs say that the EFSF buys â¬20 billion of Greek 5.3% March 2026 bonds at 60% of face. So the EFSF spends â¬12 billion. In the proposal, the EFSF would now lend Greece â¬12 billion so that Greece could buy these bonds and retire them. Greece would have â¬8 billion less debt outstanding. That is good for Greece.
The EFSF would have used their guarantees to borrow the â¬12 billion it needs. But if the EFSF lends the money to Greece for 15 years at 4%, the market value of that loan has to be less than 60% of face. The ESFS loan would be longer dated with a lower coupon than the bond that is trading at 60% of face in the market. That loan has to have a lower valuation. Letâs say 55%. So the EFSF borrowed â¬12 billion and now has an asset with a mark to market of â¬6.6 billion. Greece benefits because it got to reduce its debt by â¬8 billion, but you cannot ignore that the EFSF just did a trade that cost them â¬5.4 billion on a mark to market basis. This scheme comes at a cost (or gift), and it is yet to be determined how much the AAA countries are willing to gift to other countries."
"Finally, does the EFSF really accomplish much? One of the most ballyhooed PIIGY bank feature is the ability of the EFSF to buy bonds at a discount and lend money to the country to buy them back, thus decreasing the notional owed by that country. Letâs say that the EFSF buys â¬20 billion of Greek 5.3% March 2026 bonds at 60% of face. So the EFSF spends â¬12 billion. In the proposal, the EFSF would now lend Greece â¬12 billion so that Greece could buy these bonds and retire them. Greece would have â¬8 billion less debt outstanding. That is good for Greece.
The EFSF would have used their guarantees to borrow the â¬12 billion it needs. But if the EFSF lends the money to Greece for 15 years at 4%, the market value of that loan has to be less than 60% of face. The ESFS loan would be longer dated with a lower coupon than the bond that is trading at 60% of face in the market. That loan has to have a lower valuation. Letâs say 55%. So the EFSF borrowed â¬12 billion and now has an asset with a mark to market of â¬6.6 billion. Greece benefits because it got to reduce its debt by â¬8 billion, but you cannot ignore that the EFSF just did a trade that cost them â¬5.4 billion on a mark to market basis. This scheme comes at a cost (or gift), and it is yet to be determined how much the AAA countries are willing to gift to other countries."
