The ECB goes all-inIt's clear that the ECB is adamantly opposed to any restructuring of Greek debt. It's also becoming increasingly clear that they are willing to sacrifice the Greek banking system if they have to. What's not clear to me is why.
Central bank brinkmanship in full display this Thursday:FRANKFURT (MNI) – If Greece were to restructure its sovereign debt, its bonds would cease to be accepted as collateral by the European Central Bank, Executive Board member Juergen Stark said Wednesday, according to an ECB spokesman on Thursday.These are the liquidity operations which have acted as a lifeline to Greece in recent months, with Greek bank borrowing from the European Central Bank still hovering around €87bn at the end of March.
Or as RBS’s Jacques Cailloux puts it, Stark’s warning is… :“This is the last card in the hands of the ECB in warning about the implications of a restructuring.”
A few possible reasons come to mind.
- The ECB is afraid that the big European banks (primarily French and German) would not be able to support the losses that would result from the restructuring of Greek debt. (Though estimates I have seen suggest that such losses would not be overwhelming to the system, even if they require a bit of government-assisted bank recapitalization...)
- The ECB is afraid of contagion, i.e. afraid that restructuring Greek debt would somehow surprise the market and suddenly make market participants realize that debt restructurings could be possible for Ireland or Portugal.
- The ECB is concerned about the losses it will take on its own balance sheet. (Though really, a central bank is in business not to make money, but rather to watch over the banking system for the greater good...)
- The ECB thinks that the destruction of the Greek banking system may be a fitting punishment for Greece, and may thus act as a good deterrent to combat the danger of moral hazard that the restructuring could engender.
Regardless, the implication seems to me that the ECB is effectively pushing Greece out of the euro-zone, and ensuring that Greece will have to create its own currency once restructuring happens. As I've argued previously, once the euro-based Greek banking system is destroyed (which is what the ECB is saying will happen if Greece restructures its debt), then it will quickly become obvious that the best way to get the Greek financial system moving again will be to create a new Greek currency. Similarly, if the ECB is really going to stop acting as the lender of last resort in Greece (which is also what they're threatening to do), then that role will have to be assumed by the Central Bank of Greece. But the CB of Greece won't be able to do much as a lender of last resort for euro assets; the only way it will really be able to do that effectively is if it creates a new domestic currency, for which it can then credibly take on that role.
Really, is there any way in which the ECB's pronouncements and actions this week are helping the situation? I really can't see it. And so, I wonder: is the ECB actively trying to push Greece out of the euro-zone? And again, if so, why?
Naturally I don't really know the answer to that, but here's one very simple possible explanation: the ECB wants to make it clear to everyone that any euro country that defaults on its debt will effectively be dismissed from the euro-zone.