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Monday, May 03, 2010 12:21 PM

ECB Comes to Greece’s Aid by Waiving Collateral Rules; ECB Plays With Fire; Europe's Web of Debt

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In a move that is supposed to stop contagion and inspire confidence, the ECB Comes to Greece’s Aid by Waiving Collateral Rules

The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market.

The decision came less than a day after Greece agreed to a 110 billion-euro ($145 billion) package of emergency loans from the International Monetary Fund and its euro-region allies. Under the plan backed by the ECB, Greece pledged 30 billion euros in budget cuts to bring a deficit of 13.6 percent of gross domestic product within the EU limit of 3 percent in 2014.

Further downgrades from credit-rating companies had threatened to render Greek bonds ineligible for collateral for ECB loans after Standard & Poor’s last week cut the nation to junk status. Had Moody’s Investors Service and Fitch Ratings followed suit, Greece’s debt would have no longer been accepted under the previous rules, threatening to inflict further pain on the economy and its banks.

Today’s decision was a reversal for ECB President Jean-Claude Trichet, who began the year saying the ECB would not change its “collateral policy for the sake of any particular country.”
ECB Plays With Fire

The ECB is foolish. Greece may default a couple years down the road. In the meantime, banks can swap Greek risk straight on to the ECB in exchange for Euros.

What the ECB does for Greece, it may now feel obliged to do for Portugal and Spain.

This is a dangerous precedent that challenges the credibility of both the ECB and Jean-Claude Trichet.

Intermediate-term, the ECB's actions add more tinder to the woodpile. Spain and Portugal are the matches.

Europe's Web of Debt

The New York times has a nice European Web of Debt graphic worth a good look.

click on graph for sharper image

For the related story please see In and Out of Each Other’s European Wallets

The chart and story show some interesting facts

  • Italy owes France $511 Billion (20% of French GDP)
  • Portugal owes Spain a net a net of $58 billion
  • Spain holds nearly a third of Portugal's debt
  • Spain owes France $220 Billion
  • Spain owes Germany $238 billion
  • Spain owes the UK $114 billion

Does anyone seriously think this debt can be paid back? If so, how? Instead, I suggest this is another clear sign of just how insolvent the global banking system is.

Misguided US-Centric hyperinflationists who tend to only see US problems clearly have something else to think about.

Mike "Mish" Shedlock
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