Meanwhile, Across The Atlantic...

by Andrew Stuttaford
In this bracingly bleak piece the Daily Telegraph’s Peter Oborne begins by taking aim at what he sees as the failure of EU politicians to prepare for an unraveling of the eurozone. That’s probably too harsh. There’s a difference between what finance ministers can say in public (even admitting that they had been considering such a possibility could trigger a market panic) and what they may be pondering in private. Oborne then goes on to discuss the (hopeless) predicament in which Greece, Portugal and Ireland now find themselves, correctly highlighting the following as a key motive both for the bailouts and the refusal to default:

Were Portugal or Greece to acknowledge formally that they are bankrupt, the big banks would have to come clean with investors about the true value of these loans. As a result, massive sums would have to be written off on the balance sheets of many of European banking’s most famous names, sending some spiralling towards bankruptcy. Even those that survived would have to cut back the scale of their operations sharply, thus curtailing lending to individuals and businesses. This, in turn, would damage business activity and send Europe yet deeper into recession.

True enough, and Oborne is also quite right to acknowledge the role that large purchases of Irish, Greek and Portuguese government debt by the ECB (the European Central Bank) has played in helping those countries stave off default, but, as he notes, this all comes with a catch:

The ECB has been paying what is effectively a false price, and, as a result, is daily taking unsustainable losses. Let’s look specifically at the case of Greece, as analysed last week in a devastating piece of research by the US investment bank JP Morgan. It suggested that the ECB may now be exposed, through various means, to approximately 200 billion euros (more than £150 billion) of Greek debt. Of course, this is not worth anything like what the ECB has paid for it. JP Morgan estimates that the ECB is facing losses of around 40 billion euros on its Greek investment, though my instinct is that the true figure is considerably higher.

Horrifyingly, this piece of analysis concerned Greece alone. We do not know for certain (the ECB’s accounts are deliberately opaque), but it is a fair bet that it is facing similar losses in its dealings with Ireland, Portugal and – to a lesser extent – Spain. However, this sober Frankfurt institution flatly refuses to admit its losses. Instead, like every dodgy financier in history, it marks its investments at book value. As a result, it can be stated with virtual certainty that, if it were a normal bank, the ECB would now be considered insolvent.

Last week, in a commentary of first-rate importance, the think tank Open Europe asked a deadly question: is the ECB becoming a Bad Bank? The answer, unfortunately, is yes.

Read the whole thing, stiff drink in hand.

And then read this report from the Financial Times on the EU’s new stress tests for banks:

There is also a repeat of last year’s refusal to admit the possibility of a sovereign debt default, even though Portugal has just become the third eurozone country, after Greece and Ireland, to appeal for bail-out funding.


No worries then.

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