So why is Greece on the rack?
Take a look at the ECB’s latest paper on Short Term European Paper (STEP) – bond debt to you and me.
In the one day from the 8th to the 9th of August, it grew three billion euros. In the day from 9th to the 10th of August, it grew four billion euros. The rate of acceleration is still growing. It is today nearly 480 billion euros…a YOY increase of 100 billion euros, aka 25%.
Now take a look at French private (but especially bank and government-related) borrowing in the STEP sector.
Whereas other borrowing across Europe still looks dodgy at two or three numerals of millions per programme, the French debt is more commonly at four to five numerals.
French social security, €10.3bn, Credit Agricole €12.4bn, BNP Paribas €60bn, SocGen €39bn: these are all massively in excess of Holland, Germany, and even Italy.
And it’s clear, looking across as well as down, how incestuously interrelated all the buying and selling of this debt is.
But here’s the bottom line: whereas the total debt denominated in euros is €374bn, expressing other currency debt in euros gives us a US figure of 50 billion, and a UK figure of 23 billion.
Euro STEP debt, as of three days ago, accounted for 80% of the global total.
Surely the ECB is, one day soon, going to wind up insolvent? Well, late last year I unwittingly wrote something that isn’t true in relation to ClubMed sovereign debt, to the effect that if the ECB could no longer finance its operating expenses out of earnings, it would require support from national government central banks.
Most observers assume (I think) that there is a huge difference between the US Fed buying its own Treasuries, and the ECB buying sovereign bonds of, say, Greece. When buying Treasuries, the Fed only does monetary easing; it does not acquire credit risk, because it IS the creditor. When buying the sovereign bonds of Greece, Italy, Spain and Portugal, the ECB however does monetary easing as well as acquiring credit risk.
Not so, said the ECB bureaucrat dinner guest of a prominent Greek commentator a few weeks ago. The ECB has no credit risk because it is constituted in a way that allows it to continue even if all its assets are negative in value.
As it happens, he appears to be correct: if you look at the ECB’s Constitution, as so often with things set up by the EU, so great was the hubris at the time, disaster clauses are absent….after all, there weren’t going to be any disasters. For instance, no provisions were made for the exit of a member State from the eurozone. So too is the insolvency of the ECB never addressed in its Constitution: the only references are to reserves: (my Italics)
33.2. In the event of a loss incurred by the ECB, the shortfall may be offset against the general reserve fund of the ECB and, if
necessary, following a decision by the Governing Council, against the monetary income of the relevant financial year in
proportion and up to the amounts allocated to the national central banks in accordance with Article 32.5.
And at 32.5, we find:
32.5. The sum of the national central banks’ monetary income shall be allocated to the national central banks in proportion to
their paid up shares in the capital of the ECB, subject to any decision taken by the Governing Council pursuant to Article 33.2.
Just to be on the safe side, however, this article appears right at the end:
The ECB shall enjoy in the territories of the Member States such privileges and immunities as are necessary for the performance
of its tasks, under the conditions laid down in the Protocol on the privileges and immunities of the European Communities.
The are two pretty obvious extrapolations from this. First, the ECB’s Governing Council can do what it wants, when it wants, regarding shortfalls and income. And second, given the nature of how banks conduct their insane accounting rules in relation to outstanding debt, without any formal default by the national central bank’s Sovereign, Mario Draghi can take on debt from now until Domesday with no apparent ill-effects.
But what Dinner Guest ECB man claims goes beyond even this: his point is that the ECB’s Constitution can effectively refuse to recognise any outsider’s definition of it being insolvent. His words (roughly) are presented by the correspondent as:
“There is absolutely no requirement on the part of the ECB to recapitalise should it end up with a negative net worth after a significant write-off of bonds. The ECB could buy all the sovereign bonds of all the eurozone countries, end up holding several trillion of them – but even if all of those sovereign bonds defaulted and would never get paid, the ECB would survive perfectly well. It would simply show a negative net worth to the tune of several trillion euros”.
It gets madder, does it not?
But all this must make the average Greek – even the average Greek politician – ask why such a big deal was made about August 20th for the repayment of Hellenic bonds, when the ECB could absorb debt and even default indefinitely.
And above all, it puts the EU on the spot in relation French debt. How long will it be, I wonder, before Paris finds itself in the same spotlight as Madrid, Rome and Athens?