Business World

Wednesday 22 November 2017

Angry ECB needs to do some fresh thinking on debt crisis

First the indecision, now the split. Europe's response to the debt crisis is becoming even more confused, laboured, divisive and ineffective as the sleepy summer months approach.

Here's a prediction: none of the problems of Greece, Portugal and Ireland will be fully resolved by the time Jean-Claude Trichet waves goodbye to Frankfurt and the ECB forever in late October.

Instead, Trichet will leave behind a Europe which is split between central bankers on one side who believe that more austerity will ultimately solve the problem, and politicians on the other who want a controlled default, but aren't really sure how it would happen or when.

Trichet himself is behaving deplorably if media reports are to be believed. Storming out of meetings called to discuss a variety of options to deal with Greece's €330bn debt load is not the conduct one expects from a composed central banker setting policy for 328 million people.

Clearly Trichet has reasons to be furious with how things have played out for him.

The balance sheet of the organisation he leads has been vandalised and stretched to such an extent that it may yet need to be recapitalised in a worst-case scenario.

But it gets worse for Trichet. The ECB bought €45bn of Greek bonds a year ago in a selfless act to calm markets, but now Trichet finds out the political masters of Europe want to impose a haircut (or a restructuring of maturities) on these same securities.

This does not reward Trichet for his help, but punishes him for helping out last year amid significant Greek turmoil. (And, by the way, the ECB also holds €150bn worth of collateral put up by Greek banks).

All of this is deeply unfair on the ECB, which should be simply setting monetary policy for Europe and not bailing out the continent's entire banking system.

But indignation is still no substitute for policy, and in arguments over recent days it seems clear that the ECB has little to offer the debate apart from threats.

Its governing council members are not very subtly threatening that if Greek government bonds are restructured in some way, they will no longer be accepted at the ECB as security for loans for Greek banks. Translated, this means the ECB is threatening to bring down the Greek banking system in response to any controlled default by Greece (or a reprofiling, as Europe likes to call it).

Unfortunately for the rest of us this means the ECB and senior EU players like Jean-Claude Juncker, president of the euro group of finance ministers, are paralysed by indecision.

The ECB's rather naïve belief that Greece can miraculously grow its way out of its debt burden isn't taken seriously by many market players, including those who need to purchase the debt of Greece in the future.

The ECB is increasingly an angry put-upon player in the arguments taking place in Brussels and Frankfurt. But so far it is simply dismissing the plans of others, without putting up a credible plan of its own. As the last Finance Minister Brian Lenihan was fond of saying, "anger is not a policy''.

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