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.
The ECB has been central to Europe's crisis response, but it has not been a willing player. As Greece’s problems unfolded last spring, the ECB at first opposed the idea that it use unconventional methods to ensure economic stability among the 17 nations that share the euro.
The bank eventually capitulated — only to be drawn into an increasingly complex situation that has required it to steadily relax its standards. It has also been caught between German demands that private bondholders share in any future bailout of Greece, the exposure of its own balance sheet to Greece’s problems, and the growing sense that Greece’s debt is too high to be fixed without years of reform and some sort of debt relief.
The bank had maintained strict rules on the type of collateral it would accept when making the short-term loans needed to keep private banks adequately funded — and able to lend to customers. But as ratings agencies progressively downgraded the credit rankings of Greece, Ireland and Portugal, the ECB watered down its collateral rules so banks could continue getting loans on the basis of their sizeable government bond holdings.
The most recent such step came Thursday, when the ECB agreed to continue accepting Portugal’s bonds as collateral, despite their recent downgrade to a junk rating by Moody’s Investors Service.
Read more at The Washington Post.