European Central Bank battles defaults in Greece, Ireland, Portugal

Washington Post
July 8, 2011

As Europe’s government debt crisis deepened, the European Central Bank helped out by buying the bonds of troubled countries and accepting them from banks as collateral for loans even as they were downgraded to junk status.

Now exposed to hundreds of billions of dollars of securities issued by Greece, Ireland and Portugal, the ECB is fighting hard to ensure that those countries don’t default on what they owe. Although central bank officials say a default might put the broader European economy at risk, a growing body of analysts is questioning whether the ECB’s concerns are overstated. They contend that an organized default may be the only way to get Europe’s weakest economies back on track.

They also say that as one of the chief opponents of a default or restructuring, the ECB may be part of the problem.

“The ECB, in a sense, does not want to be a permanent ‘bad bank,’ ” the place where low-quality assets are stashed to keep the financial system functioning, said Jan Randolph, head of sovereign risk at IHS Global Insight, a consulting firm. In debating the future of Greece and other economies, “they are playing the risk and burden-sharing game. . . . Is it the taxpayers who carry the burden or the ECB? The ECB would rather have the taxpayers carry the risk” through loans from European governments and the International Monetary Fund, Randolph said.

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