Greece: if austerity doesn't work... Try more austerity! | 287 comments (287 topical, 0 editorial, 0 hidden)

Possible reading : (none / 0)

German banks have sold off enough of their Greek bonds that they are now at a manageable level; French banks have held on to theirs (or own Greek subsidiaries which hold the bonds).

So a rollover/default is something the German banks can live with, given that they have already imposed themselves a haircut. But the French banks/government are still in denial, and are soon to hit a brick wall.

Unless there is a change in ECB policy, or something.

_{It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II}

by eurogreen on Thu Jun 16th, 2011 at 04:32:37 AM EST
[ Parent ]

Re: Possible reading : (4.00 / 2)

The French banks cut their Greek exposure massively in late 2010.

Another possibility is that the French banks understand that they will get cents on their € from Greece, but want their Spanish and Portuguese bonds to mature and be rolled over before Greece makes an unequivocal demonstration to Spain and Portugal that default is not the end of the world. But that's data-free speculation on my part.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 16th, 2011 at 04:51:47 AM EST
[ Parent ]

Re: Possible reading : (4.00 / 2)

No, not data free: contagion is what everyone from Trichet through Weidmann to Lagarde is warning about.

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Thu Jun 16th, 2011 at 05:11:20 AM EST
[ Parent ]

Re: Possible reading : (none / 0)

The part about French banks I don't get is why bonds to own subsidiaries are to be considered as a risk equivalent to that faced by foreign banks holding sovereign bonds. Can't companies be much more flexible about rollovers and even haircuts in that case?

Regarding the ECB, what is your thinking about that €50 billion exposure? Could a default on that mean, as argued, an actual (or at least perceived) risk to the ECB itself? (Where I am not even sure whether that is supposed to be a liquidity, solvency, credibility, or some other crisis.)

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Thu Jun 16th, 2011 at 05:16:15 AM EST
[ Parent ]

Re: Possible reading : (none / 1)

Regarding the ECB, what is your thinking about that €50 billion exposure? Could a default on that mean, as argued, an actual (or at least perceived) risk to the ECB itself? (Where I am not even sure whether that is supposed to be a liquidity, solvency, credibility, or some other crisis.)

See Can Central Banks Go Broke? (CEPR Policy Insight No. 24)

In CEPR Policy Insight No.24, Willem Buiter asks: Does it matter if a central bank suffers a large capital loss? Can the central bank become insolvent? How and by whom should the central bank be recapitalised, should its capital be deemed insufficient?

I quoted some bits about the ECB and Eurosystem in this diary.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 05:23:47 AM EST
[ Parent ]

Re: Possible reading : (none / 1)

The key point seems to be:

Insolvency for central banks therefore would mean failure to pay obligations as they fall due (equitable insolvency) rather than liabilities exceeding assets (balance sheet insolvency).
As long as central banks don't have significant foreign exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seigniorage).

...which the ECB won't do, leaving recapitalisation by the Treasuries of the 15 Eurozone governments, which is tricky. Did I miss something?

_{*Lunatic*, n.

One whose delusions are out of fashion.}

by DoDo on Thu Jun 16th, 2011 at 05:54:15 AM EST
[ Parent ]

Re: Possible reading : (4.00 / 3)

ECB press releases: 16 December 2010 - ECB increases its capital

The European Central Bank (ECB) has decided to increase its subscribed capital by €5 billion, from €5.76 billion to €10.76 billion, with effect from 29 December 2010. This decision was taken by the Governing Council of the ECB in accordance with the Statute of the European System of Central Banks and the ECB, as well as the Council Regulation No 1009/2000 of 8 May 2000 that foresees an increase in the capital of the ECB by up to this amount.
This decision resulted from an assessment of the adequacy of statutory capital conducted in 2009. The capital increase was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk. As the maximum size of the ECB's provisions and reserves is equal to the level of its paid-up capital, this decision will allow the Governing Council to augment the provision by an amount equivalent to the capital increase, starting with the allocation of part of this year's profits. From a longer-term perspective, the increase in capital - the first general one in 12 years - is also motivated by the need to provide an adequate capital base in a financial system that has grown considerably.
In order to smooth the transfer of capital to the ECB, the Governing Council decided that the euro area national central banks (NCBs) should pay their additional capital contributions of €3,489,575,000 in three equal annual instalments. Consequently, the current euro area NCBs will pay €1,163,191,667 as their first instalment on 29 December 2010. The remaining two instalments will be paid at the end of 2011 and 2012, respectively. Moreover, the minimal percentage of the subscribed capital, which the non-euro area NCBs are required to pay as a contribution to the operating costs of the ECB, will be reduced from 7.00% to 3.75%. The non-euro area NCBs consequently will make only minor adjustments to their capital shares, which will result in payments totalling €84,220 on 29 December 2010.

Then, each national treasury will have to recapitalize its own National Central Bank, with "no fiscal transfers".

So, the problem is not whether or not the ECB will become insolvent. The question is whether the ECB will allow Eurosystem member National Central Banks to become insolvent.

ECB council members have used the threat of insolvency of the Irish and Greek central banks explicitly over the past year.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 06:04:13 AM EST
[ Parent ]

If the troubled bonds were marked to market, (none / 0)

then presumably that would eat up the €10B capital, and the ECB would already be insolvent, by its own lights...

_{It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II}

by eurogreen on Thu Jun 16th, 2011 at 08:27:31 AM EST
[ Parent ]

Re: If the troubled bonds were marked to market, (none / 0)

But the ECB itself only has €13bn of sovereign bonds from the Securities Market Programme, right? The rest is in the National Central Banks' books.

So the ECB itself wouldn't realise a €50bn loss from a Greek default...

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Thu Jun 16th, 2011 at 08:40:57 AM EST
[ Parent ]

Greece: if austerity doesn't work... Try more austerity! | 287 comments (287 topical, 0 editorial, 0 hidden)

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