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FRANKFURT (Reuters) - Greece resumes tortuous debt swap talks with private creditors on Thursday, with all eyes on the European Central Bank after International Monetary Fund chief Christine Lagarde said public sector holders of Greek debt may need to take losses too.
But the ECB is no closer to agreeing on whether or not it will take losses on the roughly 40 billion euros of Greek bonds it holds, euro zone central banking sources told Reuters on Thursday.
The central bank may be forced to take a seat at the negotiating table, however, if Greece cannot persuade enough private bondholders to sign up to a voluntary bond swap. In that case it may force those holding out to agree to a deal that would then be enforced for all creditors.
Here are some of the ECB's options:
The ECB could pass on the profits - around 12 billion euros - on its Greek bond holdings to the Greek government.
This would be roughly the same amount needed to bring down the projected Greek national debt to 120 percent of gross domestic product (GDP) by 2020 after banks have taken their proposed losses.
That way, the ECB would avoid taking a hit while still contributing to Greece's debt relief.
The most likely way this would be done is for the ECB and Greece to agree to swap bonds in the ECB's possession for new ones that would have an ironclad clause excluding them from retroactively enforced losses.
OECD head Angel Gurria said on Wednesday he thought the ECB should chip in and not book profits on Greek paper.
"The ECB bought these bonds at a discount, and I think at least this discount could be accrued in favour of Greece," Gurria told Bloomberg Television.
This could, however, be seen as crossing the red line of directly financing the Greek government.
The Cologne Institute for Economic Research said the ECB should sell its Greek bonds to the European Financial Stability Facility (EFSF) for the same price it bought them for in the secondary market - around 75 percent of their nominal value.
The EFSF would then hold the bonds to maturity and pass on the difference between the purchase price and the face value of the bonds to Greece.
That way, the ECB would skirt the issue of direct state financing but would still be helping Greece to cut its debt.
"On monetary financing, they've already crossed the line a little bit," ABN Amro economist Nick Kounis said.
"They would probably need a middle person. That's the EFSF."
Such an arrangement would eat into the EFSF's capacity, but the ECB would have more room to buy Spanish and Italian bonds before hitting the limit beyond which offsetting purchases becomes difficult.
This option could also prove unacceptable to some central banks as it could be seen as voluntarily selling the bonds below their face value.
Analysts estimate that the ECB has spent about 40 billion euros on Greek government bonds, buying them on average at 75 percent of face value. This would mean the bonds' face value is about 50 billion euros.
If the ECB had to take a loss of 70 percent, it could lose more than 20 billion euros. Considering that the ECB and national central banks have about 82 billion euros in capital and reserves, such a loss would be manageable without it having to resort to a capital hike.
Even if the losses are manageable, it is still taxpayers' money that is at stake, and participating in the debt swap could be seen as direct state financing by the ECB, which is against the treaty.
It would also be a blow to the ECB's credibility.
Its bond buying programme has been highly controversial from the start in May 2010, leading to the resignation of two high profile policymakers: former Bundesbank president Axel Weber, who had been seen as a front-runner to take over as ECB president, and Executive Board member Juergen Stark.
The two and others on the ECB council warned that the ECB was venturing too far into the fiscal arena with such purchases, posing a threat to its independence.
Even if Athens decided to force all bondholders to accept losses, the ECB could argue for an exclusion.
But the problem here is that private creditors could then reject any deal if the public sector does not participate.
"It would be outrageous if the ECB doesn't take part in the PSI as keeping their Greek bonds to maturity would allow them to make a profit, while everybody else is taking 70 percent or even more," a banking source close the debt talks said.
Such a move could also trigger a legal battle as other bondholders may try to jump on the bandwagon.
Moreover, if the ECB won "preferred creditor status", it could spoil private investors' appetite for euro zone government debt, especially from the countries whose debt the ECB has been buying. Chiara Manenti, a fixed income strategist at Intesa Sanpaolo, told investors in a note that this could hit Italian and Spanish government bonds the most.
The ECB could argue that its Greek debt holdings in its Securities Markets Programme (SMP) should be left alone because the bank acted as a 'white knight' at the time it bought them in an effort to preserve financial stability.
But the Greek bonds held by national central banks would still be affected, which would be a problem particularly for the central banks in Cyprus and Greece as they have large holdings.
These central banks might require a recapitalisation from their respective governments.
Reporting by Sakari Suoninen and Eva Kuehnen; Editing by Hugh Lawson