European Central Bank (ECB) board member Lorenzo Bini Smaghi told the Financial Times that the idea a Greek debt restructuring could be carried out in an orderly way is a “fairytale” as the confrontation between the ECB and the eurozone escalates.
Last week, it emerged that the ECB has abandoned all attempt to run a conventional monetary policy for the eurozone and handed out, instead, hundreds of billions of euros in loans to insolvent Irish, Portuguese, Spanish, and Greek banks in exchange for collateral which was hugely inflated in value, and that the ECB would have to own up to gigantic losses if Greece defaulted.
Bini Smaghi admitted in the interview with the FT on Monday that it is the tax payers who will have to pick up this multi-billion euro losses that the ECB has accumulated because of its illegal activities because tax payers have to fund the eurozone national central banks, the source of ECB funding.
“But Mr Bini Smaghi points out that the impact would fall largely on eurozone national central banks, rather than the ECB, and ultimately on taxpayers.”
The insolvent banks used the gift of ECB loans at 0% to buy souvereign bonds of insolvent countries, which were compelled to accept a penal EU and IMF bailout, so enabling those banks to make gigantic profits from the 6% interest paid by tax payers as part of the very same „bailouts“ and hold country’s hostage.
Breaching rules, the ECB is, therefore, playing a key role in what former Argentian central bank governor Mario Blejer called a public sector Ponzi scheme: it is allowing insolvent banks to make astronomical profits at the expense of the tax payer and then transfer the losses onto the tax payer’s shoulders.
If Greece restructures its debt, the ECB will be forced to write down the value of its credits and own up to these gigantic losses and the Ponzi scheme will come to a halt. The losses could amount to 100s of billions of euros.
The FT reports that the ECB has bought 45 billion euros of souvereign Greek bonds.
“The ECB has bought about €45bn ($64bn) in Greek government bonds in emergency market support operations in the past year – which would see losses if Greece defaulted.”
But the ECB also handed out 145 billion euros of loans to insolvent Greek banks in exchange for securities that were significantly overvalued.
Even with the most creative of accountancy – ECB chief Jean Claude Trichet had to face an inquiry in France for accounting irregularities at Credit Lyonnais – the ECB is facing astronomical losses when it has to write down the value of these and other credits in the event of a Greek default, and German tax payers will be very unhappy because they have to foot the lion’s share of the bill.
A default by Greece is also expected to have a knock on effect on Ireland and Portugal and also on the value of the ECB’s vast holdings of securities from insolvent Irish and Portuguese banks.
According to a report in the Irish Independent, insolvent Irish banks now hold 21.8 billion of insolvent Irish government bonds.
The Irish banks appear to have obtained the money to buy these bonds from the ECB in exchange for hugely overvalued asset based securities.
Irish banks appear now to be in the process of transforming their holdings of Irish bonds and sovereign debt into a revenue stream thanks to the tax payer’s of Ireland, and also getting ready off load the bonds onto the ECB for the tax payers of Europe as soon as Ireland is picked bare and the revenue runs dry.
An interactive graphic in The Telegraph shows the way private bank debt is being shoved onto public banks. While the transfer of private bank debt to the ECB and public banks is largely finished in Greece, the graphic shows how it is just starting in Ireland, the latest recipient of the penal EU and IMF bailout. By the end of the year, the “bank exposure to Ireland” graphic will no doubt also show the predominantly orange colour having flipped over to blue as the ECB increasingly holds onto the worthless debt unless public outcry forces the banks to dump it in a “bad bank.” This is what should have happened long ago.
The Irish Independent reports that German banks also hold €13bn worth of Irish debt with Hypo Real Estate and Landesbank BW.
A Greek default could impact not only on the value of the credits the ECB holds from insolvent Irish banks but also on the credits of Portuguese banks.
The ECB has been violating rules in handing out billions of euros to insolvent banks and insolvent governments, a fact that pushed Axel Weber to resign as head of Deutsche Bundesbank in February.
ECB chief Bini Smaghi is, however, still refusing to accept the fact that Greece is insolvent and that te ECB will have to write down the credits, perferring to try to keep up the illusion Greece is just illiquid and wring money from Greece as long as possible.
“Germany’s Otmar Issing, the bank’s chief economist until 2006, who warned that Greece was insolvent and unlikely ever to repay its debts. But Mr Bini Smaghi a former Italian finance official who has an economics PhD from the University of Chicago, insists he is wrong,” writes the FT.
It was also reported today that Greece is considering setting up a Spanish-style “bad bank” to clean up its lenders’ accounts from “toxic” Greek bonds. It looks as if ECB recognises it can no longer hide the bonds from insolvent Greek governments and banks on their balance sheet due to growing media attention, and banks are scrambling for some other method to deal with the debts.
The confrontation between the ECB and the eurozone tax payers comes amid growing warnings of unrest and civil war.
A commentary in the Suedduetsche Zeitung with the headline „Restructuing of Greece: relinquish dogma, save Europe“ indicated that „peace“ in Europe was at risk from the ECB’s „policies.” It said time was running short.