Amazingly, smack in the midst of deal to save Greece from bankruptcy, the ECB not only insists on taking no losses on Greek bonds its holds, it wants a profit on them because it bought them at what seemed at the time to be a substantial discount. The discount was imaginary. The bonds were trading at 7% at the time.
Uncomfortable Days for ECB
The ECB started buying Greek bonds in May 2010, when the eurozone debt crisis first erupted. The objective of Jean-Claude Trichet, president, was to stabilise financial markets. The assumption was that bonds bought at market prices would be held until maturity, when the ECB would book a tidy profit.
Having taken action when the private sector held back, it justifiably feels it should not have to pay a price now, said Erik Nielsen, chief economist at UniCredit. “In an emergency, the fire brigade goes in – but the deal is that it is protected.”
Economists estimate that a 70 per cent “haircut” on the face value of the ECB holdings could leave a loss of more than €20bn – a significant but not disastrous sum given the size of the reserves held by the ECB and eurozone national central banks. But the ECB’s resistance to accepting losses is not just principled. Agreeing to take a loss could be viewed as providing financial assistance to Greece – and in violation of the European Union’s ban on central banks funding governments.
ECB Itself Puts Deal at Risk
It is the ECB's insistence to be made whole that is a primary source of bickering about lowered coupon rates.
In that post I showed a calculator that suggests the IMF and Germany are angling for a haircut between 75% and 79%.
To top it off, taxpayers in the EMU states would have to cover all the ECB's losses as well.
Should the deal go through, another 100+ billion euros will be thrown down the Greece rathole. In my estimation that still will not bring Greek debt down to 120% of GDP by the targeted 2020 date, up from the targeted 2015 date, up from the targeted 2013 date.
Bear in mind, with the original 21% haircut idea, Greece was supposed to be at an 80% debt-to-GDP by 2013. So not only did timeframes stretch, the targeted debt levels did as well.
IMF Throws Its Hat Into the Ring
On Wednesday [IMF Chief Christine Lagarde] argued that if Greece’s private creditors did not accept a big enough writedown, the European Central Bank might have to take a reduction in its own Greek debt holdings. “The balance between the participation of the private and the public sector is a concerning question,” Ms Lagarde said.
Ruffled Feathers and Spooked Investors
There was no official response from the ECB but it is safe to presume the IMF's stance ruffled a lot of feathers.
However, look at the situation from the point of view of investors. If the ECB and IMF never have to take losses, and everyone else does, then investors are buying subordinate debt that should have a much higher yield.
The situation is obviously a complicated mess in more ways than one.
Place the Blame on Arrogant Fools
Place the blame for this Grecian dilemma squarely on the shoulders of former ECB president Jean-Claude Trichet, an arrogant fool who insisted on buying Greek bonds, overriding strong objections by then Bundesbank president Axel Weber who resigned in protest of the move.
Merkel Casts Doubt on Saving Greece, Insists ECJ be Empowered to Police Nannyzone
Angela Merkel has cast doubt for the first time on Europe's chances of saving Greece from financial meltdown and sovereign default, conceding that Europe's first ever multibillion euro bailout coupled with savage austerity was not working after a two-year crisis that has brought the single currency to the brink of unravelling.
In an interview with the Guardian and five other leading European newspapers, the German chancellor also insisted – against widespread resistance elsewhere in the eurozone and in the UK – that the European court of justice (ECJ) be empowered to police public spending and budget policies of the 17 countries in the euro.
She also called for the eventual creation of a European political union, with many more national powers ceded to a central government, a strengthened bicameral European parliament, and the ECJ assuming the role of Europe's supreme court.
Days before the latest EU summit, which, at Merkel's insistence and evoking scant enthusiasm elsewhere, is to finalise an international treaty between eurozone governments entrenching German-style fiscal and budgetary rigour in all single currency countries, the chancellor admitted having doubts about the strategy she had pursued during the crisis.
Despite the prime minister's blockade and the belief in Berlin that he blundered, Merkel sounded conciliatory.
"I am convinced that Great Britain wants to remain a member of the European Union. Of course, it's never easy for 27 states to hold together … We need to find that balance with everyone time and again, including the United Kingdom wherever possible."
On her "vision" for the future of the EU, though, there is unlikely to be any "balance" struck with No 10 because Merkel's hopes for a Europe united politically under a single government are at odds with Britain's views. Besides, Merkel's project would require substantial transfers of powers to Brussels that would run foul of Cameron's EU referendum law.
"My vision is one of political union because Europe needs to forge its own unique path. We need to become incrementally closer and closer, in all policy areas," the chancellor said. "Over a long process, we will transfer more powers to the [European] Commission, which will then handle what falls within the European remit like a government of Europe. That will require a strong parliament. A kind of second chamber, if you like, will be the council comprising the heads of [national] government."
"And finally, the supreme court will be the European court of justice. That could be what Europe's political union looks like in the future – some time in the future, as I say, and after a goodly number of interim stages."
There was no immediate reaction to Merkel's interview from Cameron.
Candid Interviews or Candid Lies?
I am suspicious of "candid interviews". Every time one of these European leaders starts acting pessimistically, another kick-the-can rescue is pulled out of the hat.
I also get the sense Merkel is fighting for her political life. That be the case, she has all the more reason to say anything that suits her purpose. Then again, it's always safe to assume politicians are babbling lies for political purposes.
In this case it is clear she is throwing an olive branch to Cameron. After that affair in December, it would be appropriate for him to throw Merkel an anchor.
Rest assured she would connive with Sarkozy once again to weigh the UK down with a financial transaction tax, except for two things.
- After all his Pompous "France will go it alone" buffoonery, Sarkozy pulled the Tobin Tax off his agenda bowing to French banks.
- Sarkozy is not going to be reelected.
For details please see
Merkel's Motives
My take is Merkel finally realizes Sarkozy is toast and the Tobin Tax is toast for now, and now Merkel wants to suck up to Cameron to help save her political career.
Is there any reason to believe anything else?
Greek Socialists Reject EU Mandates
A revolt by socialist lawmakers over one clause in a new structural reform package has highlighted a populist backlash as Greece races to complete talks with international lenders on a medium-term fiscal programme.
More than 60 backbenchers, among them a former European commissioner, voted against the lifting of restrictions on Greek pharmacy opening hours, as part of measures liberalising more than 130 “closed-shop” professions.
A group of conservatives were among another 90 deputies who abstained, forcing the coalition government to withdraw the article. Andreas Loverdos, health minister, appeared poised to make concessions to the rebels, saying it would be presented again “with improvements” as a separate piece of legislation.
The uproar in the chamber was emblematic of continued unwillingness by Greece’s political class to accept the discipline imposed by its European partners and the IMF in return for a second bail-out, even as the country stands on the brink of a disorderly default.
“I cannot understand a parliamentary vote that puts the interests of 12,000 pharmacists above those of 11m Greeks . . . the house must finally stop protecting these mini-oligarchs,” said Giannis Ragousis, defence undersecretary and a socialist backer of market liberalisation.
A Pame [communist trade union] official said: “Greece faces three more years of austerity, even if the latest package succeeds in stabilising the economy, and people are already facing extreme hardship.”
Eventually, Will Come a Time When ....
Eventually, there will come a time when a populist office-seeker will stand before the voters, hold up a copy of the EU treaty and (correctly) declare all the "bail out" debt foisted on their country to be null and void. That person will be elected.
That time may be at hand.
Mike "Mish" Shedlock
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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