July 27, 2011 / 3:25 PM / 8 years ago

EFSF to get new powers before year-end, key to Greek bailout

* New EFSF powers seen in place before year-end

* EFSF to conduct Greek bond buy-backs, not Greece

* Buyback to focus on bonds trading at less than 65 pct

* Buyback size not limited to 20 bln euro indicative figure

* EFSF to handle undisbursed part of first Greek bailout

* IMF has not decided yet on its share in new Greek bailout

* EFSF will not need to raise on full bailout sum on market

By Jan Strupczewski

BRUSSELS, July 27 (Reuters) - The euro zone expects its bailout fund, the European Financial Stability Facility (EFSF), to have new powers to buy the bonds of distressed countries on the secondary market before the end of the year, officials said.

The new powers, which include the possibility of lending to governments for bank recapitalisation and precautionary credit lines before they are shut out of markets, were agreed by euro zone leaders at a summit last Thursday.

But the increased EFSF flexibility has to be approved in by national parliaments in several euro zone member states.

Euro zone officials, who asked not to be named, said the aim was to have the legislation in force as soon as possible, using legislative fast-track procedures where possible.

“I expect the new powers in place definitely before the end of the year,” said one euro zone official involved in the talks on the financing package for Greece and changes to the EFSF.

The EFSF’s ability to buy bonds of distressed governments on the secondary market is important to the success of the second bailout package for Greece because the EFSF is likely to perform the buy-back of Greek bonds that is envisaged as one of the options for private bondholders.

The EFSF, set up last year when Greece received its first bailout, has an effective lending capacity of 440 billion euros.

“In my understanding it will be the EFSF itself that buys back the bonds. There are technical reasons for that,” a second euro zone official with close knowledge of the discussions said.

“The EFSF does not have these powers now, but that is precisely why the leaders decided last week to give it these powers,” they said.


Euro zone leaders agreed last week to provide 109 billion euros in new official financing to Greece until mid-2014 on top of 45 billion euros of yet undisbursed bilateral loans from the first Greek bailout and 28 billion euros that Greece is to raise on its own from privatisations.

To help the euro zone taxpayer shoulder the burden of getting Greek finances back to sustainability, private sector investors have agreed to choose from a menu of options that includes a Greek debt swap, a rollover or a buy-back to contribute a net 37 billion euros in financing in 2011-2014.

The new Greek bonds that investors would swap or roll over current holdings into would be backed by zero-coupon triple-A paper that would guarantee the principal of the new lending.

Greece, which is now working with advisers and banks, is to present a formal offer to banks by early September under which investors will be able to choose which form of involvement they want to participate in.

Tentatively, euro zone leaders allotted 35 billion euros out of the total 109 billion to collateralise the new Greek bonds in the swap and rollover options and earmarked 20 billion euros for the debt buyback.

But euro zone sources said the money earmarked for one option could be moved to another, depending on demand for each.

“Money would be moved around within the limit, it will be used differently between the various options,” a third official said. “Fifty-five billion is the total amount of credit enhancement and debt buyback,” the source said.

Officials said the buyback, being dependent on the EFSF having new powers, did not necessarily have to happen at the same time as the debt-swap operation, but could be done later.

The buyback would focus on bonds trading at less than 65 cents on the euro, officials said.

Euro zone officials also said the International Monetary Fund, which has so far co-financed roughly one third of the euro zone bailouts for Greece, Ireland and Portugal, has not yet made a decision on its share in the second Greek package.

“The IMF has not clarified its position yet,” the second source said, noting euro zone leaders had called on the IMF to maintain its previous level of commitment.

Euro zone officials said the reminder of euro zone bilateral loans to Greece from the first bailout — 45 billion euros — would be replaced by EFSF loans in the second programme.

In a statement last Thursday, euro zone leaders said they intended to use the EFSF as the financing vehicle for the next disbursement to Greece.

“The September 15 tranche of loans for Greece will come not from bilateral loans, but from EFSF loans. And the remaining 45 billion would be moved to the EFSF now, not raised bilaterally,” the second source said.

Euro zone sources said that the EFSF would not need to raise all the money agreed on Thursday for the second Greek programme on the market.

On top of 34 billion euros to finance the Greek deficit until mid-2014, the credit enhancement for the bond swap and the bond buyback, euro zone leaders also agreed on Thursday to set aside 20 billion euros for Greek bank recapitalisation.

They also promised 35 billion euros as collateral enhancement for the ECB to back Greek bonds used by Greek banks in ECB liquidity operations during the short period that Greek debt is likely to be downgraded to selective default.

“Not all of these amounts quoted as part of the Greek deal involve physical transfers of money because some can be given not in cash but in EFSF bonds. So the EFSF can issue bonds, but they will not be sold on the market,” the second source said.

The source said the 35 billion euros of ECB collateral enhancement was such an example, as might be the Greek bank recapitalisation money and the credit enhancement. (Reporting by Jan Strupczewski, editing by Luke Baker)

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