Transfer Union Taking Shape in Bond Buybacks – A

European leaders might be making a significant step towards a more sustainable solution for Greece. This solution may help Greece in a way, but may not be necessarily favored by citizens of northern countries. This includes bond buybacks and a default of Greece.

There are talks at senior levels seriously discussing a loophole that would allow the EFSF bailout fund to buy loads of Greek debt without requiring parliament approval:

The Financial Times reports that Greece would make bond buybacks of its own using loans from the EFSF. In this way, money from the rich countries of the European Union would indirectly transfer money to Greece via Greek bonds.  

This loophole means that no changes are necessary in the bylaws of the EFSF: no parliament approval is necessary. According to the report, Germany also agreed to lower the interest rates for Greece. This will help the debt struck country, but may encourage more bailouts.

What Germany got in return is an agreement for a Greek default on the European level. It seems that they managed to twist the arms of the European Central Bank and win over stubborn Jean-Claude Trichet, that said on Thursday: “No default, no selective default, no credit event”.

Trasnferunion and Greek Default Getting Serious

So, the Germans will get the private sector contribution to Greece directly via a default, and a transfer union (transferunion in German) in an indirect way that could anger citizens.

Similar ideas involving a direct transfer of funds were floated in the past. The difference now is that there is a loophole enabling it, and that the talks are serious. The Dutch finance minister,  Jan Kees de Jager is quoted in saying: “We have managed to break the knot” after saying that the negotiations are stuck during the weekend.

Currently, euro/dollar is edging higher. This sounds like an interesting and positive development for the euro, but the implications of a default for Greece are still to be seen.

Further reading:

• Downgrades for Italy and Spain are next
• Europe needs a rate cut. Now.
• EUR/USD Forecast