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Greek banks would no longer have access to refinancing with the ECB

This is the policy decision that should be highlighted.

There is no law of nature, or of economics, or of the European Union that states that the ECB can not rediscount new Greek bonds that are used to recapitalise the "good bank" part of the Greek banks, after the bondholders, management, interbank loans and deposits above the guarantee limit have been destroyed. Those new bonds will be if not pristine then at least much lower risk by any rational analysis than the old Greek bonds. Refusing to rediscount the new bonds while being prepared to rediscount the old bonds is an explicit admission that at least one of the following is true:

  1. The ECB should not be holding Greek bonds now.

  2. The ECB is threatening to refuse to rediscount Greek private bank assets based on a policy decision to punish Greece in the event of a default, rather than based on a sane and sober analysis of the real default risk at the time the rediscount is granted.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:37:36 PM EST
[ Parent ]
On 1, yes they should. There is nothing to prevent the ECB from repo-ing them at a steep discount with respect to the market valuation which already are about 50% of par value.

So, if you have a Greek bond and supposedly you can sell it at a 50% discount in the secondary market, why could you not repo it at a 60% discount?

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sun Apr 17th, 2011 at 02:50:47 PM EST
[ Parent ]
Of course that would be the sane and sensible view. But it is not logically impossible to believe that the central bank should only rediscount pristine bonds. The logical inconsistency is between admitting that it is proper for the central bank to rediscount dirty bonds before the default and not wanting to rediscount less dirty bonds after the default.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 17th, 2011 at 05:14:09 PM EST
[ Parent ]

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