By Wolfgang Reuter
Bonds worth about 3 billion are now being purchased on every trading day, with 2 billion of the bonds coming from Athens. At the moment, there is no improvement of the situation in sight. "The ECB and the national central banks operating on its behalf are currently the only buyers to speak of," says one market insider.
This policy effectively makes the ECB a so-called "bad bank" (a bank that buys up toxic assets as a means of helping out other institutions), all protestations of its president to the contrary. The pile of junk bonds on the ECB's balance sheet continues to grow. The fact that the ECB is keeping prices artificially high is downright encouraging banks to unload their risky assets onto the central bank.
Thorstein Polleit, the chief economist of Barclays Capital Deutschland, puts it this way: "The ECB is creating excess supply by buying at overinflated prices." In other words, many creditors are more inclined to sell their risky assets to the central bank under these terms. "It's a free lunch," says a top Frankfurt banker. "Anyone who doesn't take advantage of this opportunity to get rid of his securities now only has himself to blame."
But in pursuing the policy, the ECB has backed itself into a corner. What will happen if it stops supporting the market? Will the prices of the bonds of highly indebted countries then hit rock bottom?
Time for a Haircut?
To make matters worse, very few financial experts believe that the governments in question, particularly in the case of Greece, will get a handle on the debt crisis. Deutsche Bank CEO Josef Ackermann recently voiced such doubts, saying that such a failure would result in a so-called "haircut" -- that is, a debt waiver on the part of creditors. If that happened, Ackermann said, the ECB itself could be in jeopardy. The central bank's capital, currently about 70 billion, most of which is invested in the national central banks, would be severely affected or even completely exhausted, depending on how much longer the central bank continues to buy Greek bonds.
The member states would also have to inject new capital into the ECB, a particularly difficult undertaking for highly indebted countries.
Another option for the ECB would be to issue its own bonds to recapitalize itself. But this too creates a problem: At what interest rate would investors lend money to the central bank under these circumstances?
The only remaining solution would be one that has always led to inflation in the past, namely firing up the printing presses.
Good Money for Bad Debt
Although that scenario is unlikely to materialize, those who have always believed that a few days of robust ECB market intervention would be enough to reassure market players and bring yields back to a normal level were mistaken.
At first glance, the ECB's efforts to support the bonds of highly indebted countries would seem to have a neutral effect on its balance sheet, because it reflects a value for the bonds corresponding to their price. But the truth is that good money is being paid for bad debt.
The German finance minister, in particular, will feel the effects of this policy. The Bundesbank normally transfers its profits to the federal government at the end of each year -- in euros, not Greek bonds.
But paying for the bonds ties up available funds, thereby reducing profits, presumably for years to come. This too has a seriously adverse effect on the self-confidence of the central bankers.
Things could get worse. If creditors were in fact forced to forego a portion of their claims, this flow of payments could even be reversed. Under that scenario, the federal government would have to transfer money to the Bundesbank to offset its losses.
Translated from the German by Christopher Sultan
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