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The ECB Plays the Role of Scrooge

"What's Christmas time...but a time for paying bills without money?" - Ebeneezer Scrooge in A Christmas Carol by Charles Dickens

The European Central Bank has no plans to bail out Greece if it encounters difficulty in meeting its debt obligations. According to the Wall Street Journal Bank member Ewald Nowotny said,  "One has to be very clear: The ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances." In other words, "if the poor would rather die, they had better do it, and decrease the surplus population."

The bank's reasoning is understandable: a blanket guarantee to underwrite sovereign debt throughout Europe would create an untenable moral hazard. And the bank likely does not have the legal foundation to "bail out" a sovereign country. But Greece has gone through a spate of bad news: First, Fitch and then S&P downgraded Greece's credit rating to BBB+. Moody remains the only rating agency to give the country an A1 grade, but it has the country on a negative watch. They would certainly have appreciated some good tidings.

Goldman Sachs analyst Erik Nielsen notes how this news creates a strange situation for the bank and for Europe (from Bloomberg News):
This is a bizarre and ultimately untenable situation for the ECB....The unthinkable -- that the ECB would not accept sovereign securities form a member as collateral -- has become a measurable risk, and one exclusively controlled by Moody's....Moody's is now the de facto decision maker on Greek eligibility.
A European institution (the ECB) refuses to entertain the idea of helping Greece, and so everything rests on an American company (Moody's). Merry Christmas Greece? Bah humbug!

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Pat Patterson on :

The ECB hasn't refused to bail out the Greeks for the simple reason that the Greeks have refused to cut their deficit spending under the soon to expire more relaxed collateral rules and then got caught when the rules went back to a higher standard. Greece seems to have stood in a highway watching the approaching lights of a semi never believing that it wouldn't stop. Plus it's a little disengenous to rely on Goldman Sachs impartiality as it has underwritten some of these bonds with the idea that the ECB would redeem them at the higher rating. That would mean that the underwriters would have to write off the value of these bonds and then run into problems with the newer liquidity laws of the US.

Andrew Zvirzdin on :

Pat, Both good points. Greece has tried to cut its deficit, though many would argue not nearly aggressively enough. But what can politicians honestly do? Tension always runs extremely high in the Hellenic Republic, and there is little margin for reform. Honestly, the ECB may be doing Greece a service right now by forcing them to face reality. Yes, Goldman Sachs has a vested interest in the situation. But why would they try to irrationally cause fear in the market over Greece's position? I think they have honestly highlighted an important conflict between the monetary objectives of the ECB and the political objectives of the EU. What comes first, fiscal and monetary coherence or political unity? We will have to wait and see.

Pat Patterson on :

Good point but simple answer. While Goldman Sachs underwrote the higher priced bonds it will also underwrite their forced sale if not redeemable. They are simply shorting Greece's debt with the promise of fees in the future. If say all of Greece's debt was downgraded or simply not redeemable the effect would be minimal as the Greek debt and contribution to the EU zone GDP is very small. But they will have to go to secondary markets for the cash. George Soros comes to mind for one!

Marie Claude on :

each state should be responsible for its own governation, and what costs the most to a state , its fonctionnaires ! Same for us, we have too many unsuseful fonctionnaires. The ideal would be that statakrupted like it happened in the eastern republics when the soviets collapsed. that fonctionnaires don't get paid for a few months... uh, Revolution, but then again, don't forget to bail tolice :lol:

Marie Claude on :

dunno what my laptop has... "The ideal would be that statakrupted" the ideal would be that states go bankrupted "don't forget to bail tolice" don't forget to bail out police

Marie Claude on :

50 000 EU fonctionnaires on strike for 3 hours, say, becuz the EU parliament refused to allow them their whole percentage of increasing their salaries, but cut it in half ! « injustifié d’augmenter en ce moment un salaire de 16.000 euros par mois" Cohn Bendit http://bruxelles.blogs.liberation.fr/coulisses/2009/12/le-rapport-deurostat-qui-fixe-laugmentation-salariale-des-fonctionnaires-europ%C3%A9ennes-%C3%A0-37-est-disponible-ici-en-format.html it's Cohn Bendit, :lol: but I agree with him on that matter ! I don't care of being called populist, like the french journalist called Cohn Bendit in that occasion. too many EU fonctionnaire, Vaclav is right, this is becoming the Soviet Union !

Pamela on :

Moody's?! Why is anyone still giving these guys player status? They knew for well over a YEAR that there were bugs in the algorithms that produced ratings and never did a thing about it. As far as I know, they're still not fixed. The FT covered this in some detail. Haven't been able to be around much, so if I don't get back in time, I would like to wish everyone a most Happy New Year! Otherwise, we're all screwed. Best, Pamela

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