Greek default could bankrupt ECB
Thursday 2 June 2011 - by Andrew Hickley
Further debt problems in Europe could lead to the European Central Bank needing to be recapitalised after the "unqualified failure" of its bond purchase programme.
"It [the ECB] desperately wants to distance itself from the debt crisis and normalise monetary policy rather than being used as an emergency lifeboat for the sinking periphery countries," the note reads.
Scott argues that this threat to cut off Greek funding has acted as a warning to other members of the 'troika' that the eurozone would be unable to afford a default, even if it were only 'soft'.
However the ECB's refusal to help also serves as an indication of its vulnerable capital levels, he says.
"The reality is that, with the periphery countries it is trying to provide assistance to, the ECB has become so embroiled in the crisis that its own assets and capital have been severely weakened.
"The importance of this should not be lost on investors because it has, and will, limit the ability of the ECB to help shore up the periphery countries and, in the event of a default, the bank itself may need recapitalisation from the 17 Eurozone central banks."
The ECB would suffer a manageable loss of €15.8bn ($22.9bn) on its loans to Greece if the country's debt ratios were reduced to 90 per cent of GDP via a restructuring, given that it has holds capital worth €81.2bn ($117.5bn), Scott says.
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