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Greek debt swap plan gets cool euro zone reception

By Jan Strupczewski

BRUSSELS, Feb 3 (Reuters) – A Greek proposal to swap government debt for bonds with interest payments linked to economic growth got a sceptical reception from euro zone officials on Tuesday.

Greece’s new finance minister, Yanis Varoufakis, on Monday floated the idea that Greek bonds held by the European Central Bank and part of the debt owed to euro zone governments — 53 billion euros of bilateral loans — could be swapped for either growth-linked, or perpetual bonds.

It was unclear if the idea entailed dropping demands for an official debt write-off or not. Varoufakis said Athens stood by its debt reduction demand but a source said the demand for a debt “haircut” was no longer there.

Either way, euro zone officials involved in negotiating financial assistance for Greece gave the debt swap a cool reception.

“We need more details. But first reactions are rather sceptical,” one euro zone official said. “There is a worry that it’s just a new trick how to do a haircut.”

Officials said there was no appetite for a restructuring of Greek debt held by the euro zone, now 195 billion euros.

The European Central Bank and euro zone national central banks that form part of the ECB system hold roughly another 50 billion euros.

“Varoufakis is intelligent, but he is underestimating the problems, and the constitutional leeway of the ECB and euro zone governments,” a second euro zone official said.

Apart from legal issues, the proposed debt swap posed several practical problems.

“With the caveat that we are lacking the details we’d need to assess the idea properly, I don’t see much appetite for it, and possibly considerable practical difficulties,” a third euro zone official said.

“For starters, what would be the threshold growth rate used for the growth-linked bonds? Would you base it on forecasts — presumably not — or actual data? What if the figure is later revised up or down, as can happen?” the official said.

A German DIW think-tank paper supported growth-linked bonds because they would lower the likelihood of a Greek default, stabilise the debt ratio even if growth was weak, provide an incentive for reforms and, if growth took off, they would make more money for the euro zone lenders.

But euro zone officials said the ECB was unlikely to agree to hold growth-linked or perpetual Greek bonds — paper that never matures but pays a relatively high annual interest – and that the financial conditions Greece now had from the euro zone bailout fund, the EFSF, could hardly be improved on.

“My gut reaction is that it’s a no go,” a fourth official said. “Why the financial engineering, if the costs are already as low as they can get?

“This is all very disturbing, if this is the best that Greece can come up with,” the official said.

Greece has a grace period on the repayment and servicing of its loans from the euro zone until 2023 and the average maturity of the loans already is 32 years.

(Editing by Mike Peacock and Giles Elgood)

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