The Corner

Ever Closer Union

On the day that the Eurozone’s leadership announces that it has blended its old bailout fund (the European Financial Stability Facility) with what was originally intended to be its replacement (the European Stability Mechanism) to build a bigger, better emergency stash amounting to¸ well, it’s not so easy to say (check out Open Europe’s calculations here), Germany’s central bank,  the Bundesbank, does this (via the Wall Street Journal):

FRANKFURT—The central bank of Germany will no longer accept bank bonds backed by Ireland, Greece and Portugal as collateral, becoming the first euro-zone central bank to exercise a new privilege to protect its balance sheet from the region’s debt crisis. The decision signals the determination of the Deutsche Bundesbank to limit risks from the nonstandard measures the European Central Bank has taken to combat market stress during the crisis.

More broadly, it reflects concerns that the ECB’s crisis-fighting measures may be encouraging banks to shift debt of dubious value to central-bank balance sheets, ultimately exposing taxpayers to what may wind up being toxic assets.

Last week, the ECB gave the 17 national central banks in the Eurosystem permission to reject collateral bonds backed by governments that have received a bailout from the European Union and International Monetary Fund or whose credit rating falls below ECB standards. 

Taking advantage of that freedom, the Deutsche Bundesbank has decided to no longer accept bonds guaranteed by Ireland, Greece and Portugal, starting with €500 million ($665.1 million) already on its balance sheet, a spokeswoman said on Friday. All three countries are receiving loans from the EU and the IMF to keep their governments afloat.

“Our credit assessment of these government-guaranteed bank bonds does not meet the minimum requirements for collateral,” the Bundesbank spokeswoman said. She added that to her knowledge the Bundesbank is the first euro-zone national bank to reject such bonds.

At the end of February, German-based banks had a total of €47.50 billion in borrowings from the ECB, using the Bundesbank as their counterpart. The €500 million it holds in collateral therefore only affects 1% of German banks’ borrowings.

But it’s the thought that counts.

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