Mario blinks

Economist
February 8, 2012

Most adolescent boys grow out of playing chicken when they realise the winner of the game is not the bravest, but the one too stupid to be aware of the consequences of continuing to play.

During the euro-zone crisis, the European Central Bank (ECB), along with Germany, have excelled at the game, allowing the sovereign-debt crisis to teeter on the edge of disaster in order to push Greece (and Italy) to make deep fiscal cuts and undertake structural reforms. The tactic has worked—in large part because the ECB seemed credible in its role as the fearless lunatic. Most believed that the bank is so bound by its doctrine that it would rather risk calamity than start the printing presses. As a result, Italy ejected its government and started the long, hard climb back to competitiveness. Greece has been pushed to the very limits of what it can do.

After both Italy and Greece have blinked, will Mario Draghi, the president of the ECB, now blink too?

The answer is likely to come in the form of an announcement (possibly tomorrow, after the meeting if the bank's board) of how the ECB intends to deal with its holdings of Greek government debt. Most of these were bought in the open market at a deep discount to their face value. Yet the ECB has repeatedly insisted that it will not be subject to a “haircut” that will reduce the nominal value of its holdings. If it prevails, the ECB could in fact make a tidy profit—at a time when banks and other private holders of Greek debt are being asked to “voluntarily” agree to a bond swap that will reduce the value of their holdings by as much as 70%.

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