Thursday, February 02, 2012

ECB should hand its discount on bonds to Athens, Lisbon & Dublin?

An iteresting discussion on the horrendous mess in which the ECB has landed itself and us, is on Acting Man blog this morning, linked here. A taste of the matters considered comes from this quote:
What this once again demonstrates is that the fate of interventionist policy as a rule is that it provokes a slew of unintended consequences. Once these rear their head, it is held that new interventions must be implemented to fix what the original ones have broken.
On the one hand it seems almost blindingly obvious that the ECB as a public institution should be prepared to forego a profit it will make on the backs of Greece's citizens who are already faced with unbearable economic conditions and a plethora of new taxes. Alas, it is equally clear then that it can not treat Greece as a 'special case'. Portugal and Ireland are no less deserving of getting a break – if anything, they are more deserving, as they at least did what the Greek government to this day has failed to do, namely meet the targets set out by the bailout program.
There is an interesting and quite elegant solution to the problem however due to how the euro-system of central banks is structured:
“The ECB doesn't need to take formal action to alleviate Greece's bond burden. National central banks hand their profits over to their respective governments, although they keep some for capital buffers. The Bundesbank distributed €2.2 billion to Berlin in 2010. It was twice that the previous year. Governments could simply decide that profits they receive from Greek bonds be earmarked for Athens. "The ECB could say is it's up to the shareholders on what to do with the profits," said Mr. Schulz.”

This blog continues to believe that in the long (if not even the short to medium run) the real problem for the ECB will not be the matter of profits on all its worthless pieces of paper it has bought or stood behind during the crisis, but rather which of its shareholders will eventually be stuck with the very real losses.

The above discussion therefore is included for its very surreal nature to provide some much needed early morning amusement amongst the bitter cold and generally gloomy news!



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