Even as we are distracted by political upheavals at home, the debate on how best to reorient the euro zone’s bailout mechanisms continues. The proposal gaining most traction, with at least a degree of German support, is to allow countries in difficulty to use EFSF funds to buyback their own debt on the secondary market. The initial focus is on Greece, but any new mechanism should be available in time to Ireland. (Wolfgang Munchau provides a critical analysis here.)
The attraction of buybacks is that they allow a country to reduce the face value of outstanding debt without a formal default. A disadvantage is that they can be gamed by bondholders: it makes sense for bondholders to hold out for a higher price if a buyback is really expected to improve creditworthiness. One partial solution that I mentioned previously is for countries to buy back the debt accumulated by the ECB through its Securities Markets Programme (see here).
Writing on Friday before the latest developments, Arthur Beesley reminds us of the stakes:
[T]he debate merits serious attention across the political spectrum in Dublin. Political activity for the next . . . weeks will centre on the election, but neither the Government nor the Opposition can afford to lie low on this front.
The debate on Greek debt takes place amid an intensive negotiation of key reforms to the European Financial Stability Facility (EFSF) rescue fund, including lower interest rates. Any inattention here would hamper Ireland’s argument for a rate cut, which is already difficult. But the Irish dimension does not end there, far from it.
. . .
[S]etting the election date brings clarity as to when a new government is likely to take office. From the perspective of European talks, the timing is tricky enough. Polling day is March 11th. EU leaders are working to make final decisions on EFSF reforms and a new permanent bailout fund at a summit only 13 days later.
There will be time – just about – to install a new taoiseach. By then, however, the really tough talking may well be done.