Second Greek bail-out could reach €120bn; Bild notes that a battle is going on within the German ruling coalition, as a growing number of MPs are questioning if Germany should take part in a second Greek bail-out. However, Reuters reports that the German Bundestag has today endorsed a non-binding resolution backing additional aid for Greece, which was presented by MPs from German Chancellor Angela Merkel’s CDU, the CSU and the FDP. Handelsblatt cites a study by the Institut für Weltwirtschaft claiming that the eurozone debt crisis has torpedoed the German government’s plans to reduce Germany’s public debt, due to the cost of the eurozone bail-outs. Meanwhile, an article in the Irish Times reports that European Commission President José Manuel Barroso has said that the Greek crisis presents “risks” to Ireland’s return to the debt markets next year, as foreseen in the Irish bail-out programme. Il Sole 24 Ore reports that Italian Prime Minister Silvio Berlusconi and Italian Economy Minister Giulio Tremonti have reached an agreement on a new €45bn austerity plan, with €40bn cuts envisaged for 2013-2014. Trichet also signalled that the ECB could raise interest rates next month. Meanwhile, Le Monde reports that yesterday the Greek government signed off on a new austerity package envisaging cuts worth €28.4bn until 2015, of which €6.4bn is to be finalised by the end of the year. A vote in the Greek parliament is expected by the end of June. In an article looking at the financial risk that the ECB has taken on during the eurozone crisis, the Economistcites Open Europe’s briefing on the ECB’s exposure published this week. The article quotes Open Europe warning of the ECB’s “potentially huge” risk to taxpayers “buried in the ECB’s books”. The report also features on Slovakian financial daily HNonline. Monday, June 06, 2011 With Greece forced to seek a second bail-out to avoid bankruptcy, Open Europe has today published a briefing cataloguing how the eurozone crisis could drive the European Central Bank itself into insolvency, with taxpayers likely to pick up a big chunk of the bill. The role of the ECB in the ongoing eurozone and banking crisis has been significantly understated. By propping up struggling eurozone governments and providing cheap credit to ailing banks, the ECB has put billions worth of risky assets on its books. We estimate that the ECB has exposure to struggling eurozone economies (the so-called PIIGS) of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Of this, around €190bn is exposure to the Greek state and Greek banks. Should the ECB see the value of its assets fall by just 4.25%, which is no longer a remote risk, its entire capital base would be wiped out. Open Europe’s Director Mats Persson said, “The ECB’s attempts to paper over the cracks in the eurozone may have temporarily softened the impact of the crisis, but have exacerbated the situation in the long-term. The ECB has dug itself into a hole and now we are seeing that there is no easy way out.” “Huge risks have been transferred from struggling governments and banks onto the ECB’s books, with taxpayers as the ultimate guarantor. There’s a real risk that these assets will face radical write-downs in future with eurozone governments and banks teetering on the edge of bankruptcy. This amounts to a hidden – and potentially huge – bill to taxpayers to save the euro.” “The ECB’s wobbly finances and operations to finance states have landed a serious blow to its credibility. It must now seek to become the strong, independent bank that electorates were promised when the Single Currency was forged.” To read the full briefing, click here:http://www.openeurope.org.uk/research/ecbandtheeuro.pdf KEY POINTS: - In parallel with the IMF’s and EU’s multi-billion euro interventions, the ECB has engaged in its own bail-out operation, providing cheap credit to insolvent banks and propping up struggling eurozone governments, despite this being against its own rules. The ECB is ultimately underwritten by taxpayers, which means that there is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB’s books. - As a result, the ECB’s balance sheet is now looking increasingly vulnerable. We estimate that the ECB has exposure to struggling eurozone economies (the so-called PIIGS) of around €444bn – an amount roughly equivalent to the GDP of Finland and Austria combined. Although not all these assets and loans are ‘bad’, many of them could result in serious losses for the ECB should the eurozone crisis continue to deteriorate. Critically, struggling banks in insolvent countries have been allowed to shift risky assets away from their own balance sheets and onto the ECB’s (all the while receiving ECB loans in return). Many of these assets are extremely difficult to value. - Overall, the ECB is now leveraged around 23 to 24 times, with only €82bn in capital and reserves. In contrast, the Swedish central bank is leveraged just under five times, while the average hedge fund is leveraged four to five times. This means that should the ECB see its assets fall by just 4.25% in value, from booking losses on its loans or purchases of government debt, its entire capital base would be wiped out. - Hefty losses for the ECB are no longer a remote risk, with Greece likely to default within the next few years – even if it gets a fresh bail-out package from the EU and IMF – which would also bring down the country’s banks. We estimate that the ECB has taken on around €190bn in Greek assets by propping up the Greek state and banks. Should Greece restructure half of its debt – which is needed to bring down the country’s debt to sustainable levels – the ECB is set to face losses of between €44.5bn and €65.8bn on the government bonds it has purchased and the collateral it is holding from Greek banks. This is equal to between 2.35% and 3.47% of assets, meaning it comes close to wiping out the ECB’s capital base. - A loss of this magnitude would effectively leave the ECB insolvent and in need of recapitalisation. It would then have to either start printing money to cover the losses or ask eurozone governments to send it more cash (via a capital call to national central banks). The first option would lead to inflation, which is unacceptable in Germany, while the second option amounts to another fully fledged bail-out, with taxpayers facing upfront costs (rather than loan guarantees as in the government eurozone bail-outs). - The ECB’s actions during the financial crisis have not only weighed heavily on its balance sheet, but also its credibility. First, as a paper published by the ECB last year noted, “The perceptions of a central bank’s financial strength have an impact on the credibility of the central bank and its policy”. Secondly, by financing states, the ECB has effectively engaged in fiscal policy – and therefore politics – something which electorates were told would never happen. - Worried about the risk of these potential losses being realised, the ECB is vehemently opposed to debt restructuring for Greece and other weaker economies. However, continuing the ECB’s existing policy of propping up insolvent banks – and intermittently governments – would be even worse for the eurozone as a whole. - The ECB’s cheap credit has served as a disincentive to struggling banks to recapitalise and limit their exposure to toxic assets in weak eurozone economies. This creates moral hazard for banks and governments alike, at times even fuelling the sovereign debt crisis, while transferring more of the ultimate risk to taxpayers across Europe. Therefore, in its attempt to soften the immediate impact of the financial crisis, the ECB may in fact have exacerbated the situation in the long-term, increasing the cost of keeping the eurozone together for taxpayers and governments. - Moving forward, the ECB must return to its original mission of promoting price stability and a way has to be found to get ailing banks off the ECB’s life support. This should include a winding-down mechanism for insolvent banks. NOTES FOR EDITORS 1) For more information, please contact the office on 0044 (0)207 197 2333, Mats Persson on 0044 (0)779 946 0691 or Raoul Ruparel 0044 (0)757 696 5823. 2) Open Europe is an independent think-tank calling for reform of the European Union. Its supporters include: Sir Stuart Rose, former Chairman, Marks and Spencer plc; Sir Crispin Davis, Former Chief Executive, Reed Elsevier Group plc; Sir David Lees, Chairman, Tate and Lyle plc; Sir Henry Keswick, Chairman, Jardine Matheson Holdings Ltd; Lord Sainsbury of Preston Candover KG, Life President, J Sainsbury plc; Sir John Egan, Chairman, Severn Trent plc; Lord Kalms of Edgware, President, DSG International plc; Hugh Sloane, Founder, Sloane Robinson. For a full list, please click here: http://www.openeurope.org.uk/about-us/supporters.aspxEurope
Barroso: Greek crisis could put Ireland’s return to the markets in 2012 at risk
Reuters reports that, according to several eurozone sources, the second bail-out package for Greece could reach €120bn. The EU and the IMF would contribute €60bn, with €30bn coming from the sale of Greek government assets and €30bn provided through an extension of Greek debt held by private investors. However, FAZ quotes eurozone sources saying EU finance ministers may not be able to reach a decision on the second Greek bail-out when they meet in Brussels on 20 June.
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€444bn exposure to weak eurozone economies risks bankrupting the European Central Bank
Friday, 10 June 2011
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