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As Greece Battles a Debt Crisis, Its Banks Issue More Short-Term Debt

A strange thing is happening as Greece struggles to avert bankruptcy: Its troubled banks are loading up on more debt.

These short-term bonds, which have been issued by the country’s largest banks and carry the guarantee of the Greek government, are not being sold to foreign investors. They are being issued to the only entity that would dare buy them: themselves.

In the last four months, some of Greece’s largest banks, including Piraeus, Alpha and Eurobank — have self-issued more than 13 billion euros’ worth, or $14.3 billion, of these government-guaranteed bonds.

Wounded by vanishing deposits and bad loans, Greek bank bonds are about as toxic an investment as can be found. The banks are on life support via an emergency lending program overseen by the European Central Bank, via which they have access to short-term loans from their own central bank.

But to secure this credit line, about €71 billion (more than half the deposits outstanding in Greece), these banks need to provide collateral to the Greek central bank.

As was the case in Cyprus during its banking crisis, when a financial system implodes, finding acceptable collateral to swap for desperately needed loans can be difficult.

The solution has been for the banks to manufacture and issue billions of euros of short-term bonds, which — because they carry the guarantee of the Greek government — can be used as collateral to secure much-needed cash from the European Central Bank.

As long as the bank’s problem is access to short-term funds and not solvency, such machinations can work. In the last year or so, Greek banks have issued more than €50 billion worth of these securities at artificially high interest rates (the higher the rate, the more valuable the collateral becomes in securing loans).

But the strategy has been controversial, and it was criticized by none other than Yanis Varoufakis, the Greek finance minister, who, a year ago described the practice as a “hidden bailout from European taxpayers.”

Mr. Varoufakis, then a relatively unknown economist, argued that the loans were a potent risk for Greece, which would have to assume responsibility for them if the banks failed.

The practice has also been flagged by two German economists as a questionable way for troubled eurozone economies to extract funding from the central bank.

Uncomfortable with the amounts of bonds being issued, the European Central Bank said that, as of March, it would no longer accept such paper.

But there appears to be no restriction on the banks using these bonds to tap credit from their own central banks, and they have done so. The most recent case occurred Tuesday, when Piraeus, Greece’s largest bank, issued a €4.5 billion note at 6 percent, which matures in July.

“These fake bonds have the ability to convert quickly into real obligations of the state if Greece, or the underlying banks, tank,” said Mitu Gulati, a sovereign debt specialist who has written extensively on this topic. “And that possibility is looking increasingly real, given the current drama.”

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