Lines are being drawn in the fight over how to handle the Greek fiscal crisis. The ECB and Greece are wrangling over a potential restructuring of Greek debt or an increase of financial aid to the country in return for further spending cuts and asset sales. Following comments from ECB executive board member Jürgen Stark, the ECB has chosen its side against a haircut.
An article from the FT Alphaville highlights Stark’s comments as the ECB would cease to accept Greek bonds as collateral for loans to Greek banks should Greece choose to restructure its sovereign debt. Stark was quoted as saying, “Sovereign-debt restructuring would undermine the eligibility of Greek government bonds.” Earlier comments in the week from EU officials warned a restructuring would be detrimental to the Greek banking system. Greek banks receive roughly 90B euros from the ECB in liquidity provisions.
Following these comments the ECB is intensifying its fight against a restructuring of Greek sovereign debt. It is no surprise that the ECB does not support a haircut for Greek bonds as the ECB is rumored to have 40-50B euros worth of Greek debentures on its books that it purchased when the markets for European sovereign debt income markets locked up and there was no counterparty left to take the other side of trades.
Thus a haircut on Greek sovereigns would be detrimental to the balance sheet of the ECB and consequentially impact European banking liquidity. It is also not in the interest of Greece to shut off this source of liquidity as this would force Greek banks to turn to the central bank of Greece for liquidity, an ultimately less efficient and more expensive source of funding.
The threat of the ECB to withdraw its support for the Greek banking system should Greece decide to restructure its sovereign debt is a threat that should be taken seriously and throws the ECB and all its clout behind other alternatives to solve the Greek fiscal crisis.
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