The European Central Bank has ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit, central bank sources told Reuters on Wednesday.

Earlier this month, speculation that the bank was considering taking losses on its Greek bonds as part of broader moves to stabilize Athens' finances grew after ECB President Mario Draghi repeatedly dodged questions on the issue.

One source close to talks among ECB policymakers said that while France, Italy and the ECB board in Frankfurt were against accepting losses, some national central banks, which have expressed reservations over the bond purchases from the start, now accepted that losses may be unavoidable.

The ECB will not take losses on its Greek bond holdings voluntarily ... but there is a fierce debate within the ECB on how to handle forced losses, the source said.

Another source said the bank was holding regular talks on Wednesday and Thursday and aimed to hammer out its position on the losses it should or should not be willing to take on its Greek bonds.

The ECB declined to comment.

Athens has been in talks with private creditors on a voluntary debt swap deal that would wipe 65-70 percent off the face value of its bonds.

But it has also threatened to enforce losses on private investors if fewer than expected sign up to the deal voluntarily.

If it takes that route, the question is whether the ECB would then be able to avoid taking writedowns on the Greek bonds it has bought since starting a controversial bond buying program in May 2010.

Analysts estimate the ECB has roughly 40-45 billion euros worth of such bonds, making it Athens' single biggest creditor. They also believe the ECB paid 25-30 percent below face value for the bonds.

The ECB may perhaps try to argue that it should be treated differently from other bond holders because its purchases were part of its emergency response to the debt crisis.

Economists have also speculated that it could try to carve out a deal to pass the bonds over to the euro zone rescue fund, the EFSF, which would take the hit instead.

Alternatively, it could simply accept back what it paid for the bonds, although even that would entail some complications.


Greece's talks with private investors hit a hurdle after euro zone ministers rejected the creditors' final offer for a 4 percent coupon on new bonds to be issued by Athens, increasing the chance that the latter would have to enforce losses.

Greece needs a deal to avoid a chaotic default when big bond redemptions come due in late March.

International Monetary Fund Managing Director Christine Lagarde put pressure on the ECB on Wednesday, saying it and other public creditors may need to accept losses if those taken by the private sector are not enough to bring Greece's debt burden down to a sustainable level.

While ECB chief Draghi this month avoided commenting on the issue, its vice president Vitor Constancio said the central bank had not changed its position from that expressed by Draghi's predecessor, Jean-Claude Trichet.

Trichet said in June that the ECB had no intention to extend the maturities of its debt holdings, a key element in making Greece's debt sustainable.

Now some of the countries which were most in favor of the ECB starting to buy government bonds in May 2010 through its Securities Markets Program (SMP), including Italy and France, vehemently oppose accepting any losses on them, the source said.

Separate sources said that the ECB Executive Board shared this view, but one added that in the event of Greece imposing losses some central banks see losses as an unavoidable consequence of the risk taken when the ECB launched the SMP program.

We are of the opinion that it may be unavoidable, the source said.

If the ECB finds a way to avoid losses even if other investors are forced to accept them, it could sap demand for Italian, Spanish, Portuguese and Irish debt that the ECB has also bought, as markets would view the ECB as having 'preferred status'.

This could do more damage than good, one source said.

(Reporting by Eva Kuehnen, Andreas Framke; Writing by Sakari Suoninen; Editing by Hugh Lawson)