ECB Double Standard - will there ever be a credible solution as long as the ECB gets treated differently ?

ECB’s double standard

by DY 15 Jan 2012

ACCORDING to a report by the London-based think-tank Open Europe, the introduction of collective action clauses (CACs) would also force a haircut on the Greek bonds held by the European Central Bank, which has so far refused to participate in PSI talks on grounds that it is an “official” rather than private bondholder.    However, the ECB is the biggest single holder of the country’s bonds, having purchased around 60bn euros of Greek debt in the secondary bond market at a haircut of 20 percent under its controversial Securities Markets Programme (SMP), which is supposed to stabilise the eurozone bond markets.    Fitch Ratings’ sovereign bond director David Riley said the ECB refusal to write down its Greek bondholdings meant private bondholders must take on more losses to reach a given reduction in Greece’s debt load. If the CACs were introduced, the forced writedown on all holders of Greek debt could cost the ECB some 12bn-18bn euros, said the Open Europe report.  “Not the end of the world for the ECB, but it would be a huge blow to its overall approach to the eurozone crisis,” it added, referring to the German Bundesbank doctrine that no EU central bank should be allowed to participate directly in the financing (or writedown) of government debt. “It would be ironic for the ECB to single itself out again, even as a holder of publicly tradeable financial instruments, making a profit on them but refusing to take the same losses as everybody else,” he added.   “If the eurozone is faced with a choice between failure of the PSI, and a legally-binding restructuring affecting all creditors, it should choose the latter without hesitation,” wrote Neil Unmack in a Reuters’ Breakingviews comment on January 11.    Senior status   Alternatively, the ECB could resist these losses by posing as a “senior creditor” compared to all other bond holders. But this would deliver the final blow to eurozone bond markets by introducing a double standard in securities transactions as investors would face the prospect of being the first ones to take losses before the ECB pays for its own market interventions.   The ECB has already played a detrimental role in the eurozone debt crisis “by refusing - under various juridical pretexts - to act as lender of last resort for countries like Greece or Italy in order to stabilise their borrowing costs at sustainable levels, instead of fomenting speculative attacks on them,” said economist Vasilis Viliardos.