Pride or profit: How much financial risk has the ECB taken on as a result of the euro debt crisis?

Economist
June 9, 2011

Central bankers are not meant to be quotable. When it comes to the euro-zone debt crisis, however, you can rely on European Central Bank (ECB) board members for a colourful soundbite. A Greek debt restructuring would be “suicide”, said Lorenzo Bini Smaghi, an Italian board member, last month. Jürgen Stark, the ECB’s chief economist, has blamed Anglo-Saxon “vested interests” for market chatter over restructuring. Such vehemence is striking. Some wonder whether the ECB’s own exposure to struggling peripheral economies explains it. If the likes of Greece were to default, after all, the ECB and its constituent national central banks (NCBs) would be in the financial firing-line. A report by Open Europe, a think-tank, this week warned of a “potentially huge” risk to taxpayers “buried in the ECB’s books”.

The ECB has made no secret about two ways in which it is exposed. First, it has let banks of troubled euro-zone economies borrow as much as they need through its refinancing operations, even if the collateral on offer, such as government debt, is rated below investment grade. Its argument for accepting dodgy collateral is that ratings are irrelevant as long as countries retain the lifeline of official bail-out money: the IMF trumps the markets.

Another openly declared operation has been the ECB’s purchases of government bonds of the three afflicted countries (Greece, Ireland and Portugal) in the secondary market. This “securities markets programme” (SMP) began in May 2010 to try to beat back market pressures on Greece, even though it meant the ECB backtracking on its insistence that it would never go down this route. By early June the ECB had made purchases worth €75 billion ($110 billion), of which €45 billion is reckoned to have been Greek government debt.

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