Is the European Central Bank solvent enough to cope with the eurozone crisis?

7th June 2011

On the Financial Times website (paywall) questions are raised about how much the ECB will lose if politicians fail to prevent Greece defaulting on its debts.

On his Mindful Money blog Richards writes: "One of the themes of this blog has been that the actions of the European Central Bank have left it looking very exposed"

"Put another way if you were to give it a credit rating and treat it as an ordinary bank you would be giving it an ever lower one.

"The reason for this is the bonds and bills it has on its books because of the various support operations it has undertaken in response to the credit crunch.

"In general most central banks have suffered a deterioration in credit quality due to their responses to the credit crunch but the ECB has had a good go at making sure it is the worst affected."

Richards claims the ECB has overstretched itself via a covered bond purchase programme which ran until the 30th June 2010 and totalled some 60.3 billion euros. 

This was followed by the Securities Markets Programme where the ECB purchased some 76.5 billion euros worth of debt from Greece, Ireland and Portugal in a failed attempt to support these bond markets.

Richards explains: "In addition the ECB indulged in various liquidity support operations where it has provided as much liquidity as the markets (essentially banks) wanted at a cheap rate of interest which was its main rate which it had reduced from 4.25% to 1% in response to the crisis (and has only recently risen to 1.25%).

These long-term refinancing operations were for a term of a year but now are only for 3 months. So not only is a lot of collateral on the ECBs books but look what it was willing to accept as well." reports that Open Europe, a London-based think-tank, now believes "hefty losses for the ECB are no longer a remote risk."

It estimates the ECB has €444bn in exposures to Spain, Italy, Portugal and Ireland, as well as Greece. "There is a hidden – and potentially huge – cost of the eurozone crisis to taxpayers buried in the ECB's books."

Only last week the cost of insuring Greek government bonds rose, as reported in the Guardian, after ratings agency Moody's said there was now a 50% chance of the country defaulting on its debts.

The warning came as Moody's cut Greece's credit rating to Caa1, almost the lowest rating assigned to any country.

On Richard's blog James comments: "Everyone knows that the debt can't and won't be repaid by Greece etc. Then, all the politicians agree to pretend that this cannot be true. Once this pretence is accepted, the debt is worth 100% and so there is no problem.

"Meanwhile, back on planet earth, private investors spot the flaw in the above argument and remove deposits from banks and sell bonds. This now means that those same politicians, who unfortunately control our tax money, have a choice:

1. They can admit the truth, that a lot of money has been lost; or

Leave a Reply

Your email address will not be published. Required fields are marked *