by Vito J. Racanelli
Barron's
June 11, 2011
The investor focus on Europe's worsening sovereign-debt crisis has centered on teetering Greece. That, combined with the bickering between officials of the European Union and European Central Bank about how to resolve this Gordian knot, has distracted investors from an important fact.
The ECB itself is up to its neck in risky debt, about 444 billion euros ($637 billion) from the so-called debt-challenged PIIGS pen—Portugal, Ireland, Italy, Greece and Spain. Given the ECB's leverage, should one or more countries fail, there's a good chance the write-downs to the ECB's capital would force the central bank itself to recapitalize.
A report last week from Open Europe puts ECB PIIGS exposure, which includes directly held bonds, loans and collateral such as PIIGS bonds, as well as asset-backed securities, at about €444 billion. It isn't all toxic, but enough—such as the Greek portion, an estimated €190 billion—gives pause. (Open Europe is a think tank skeptical of monetary union and backed by U.K. businesses.)
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