Thursday, January 26, 2012



Today’s, (i.e., Thursday, 1/26’s, page A8) Wall Street Journal reports that IMF chief Christine Lagarde, speaking at the Davos annual Narcissus bacchanal, contended that

Greece’s public sector creditors may have to take a hit on their loans if private lenders can’t agree on a restructuring plan that goes far enough to make the country’s debt sustainable.

(For some reasons that the Greek debt talks aren’t going as well as the eurocrats would like, see my already seminal 1/23/12 post “THEY SAID MAYBE I COULD HELP MOVE THINGS ALONG, MIKE; THEY SAID YOU WERE BEING TOUGH IN THE NEGOTIATIONS…”. Okay, now that you’re up to speed…)

The principal public creditors of Greece are eurozone governments and, of course, the European Central Bank (“ECB”). The ECB has been quite adamant that it will not take a hit on its Greek bonds; it seems that, in the ECB’s view, private sector players who make bad investments should suffer the discipline of the marketplace (well, maybe not, but that’s another story) but public sector players, doubtless due to their Olympian wisdom, must be absolved of responsibility for any mistakes they make…for the good of the public, of course.

Always the contrarian, yours truly would argue that it would be a very good thing if the ECB is made to take a hit, the more painful the better, on its Greek debt holdings and to suffer the ridicule and questioning that such a haircut (scalping, really) would entail. Why? Perhaps after being ridiculed and held to account for its cavalier attitude toward the money it creates, the ECB might be a bit more circumspect about buying European sovereigns.

Horrors! How could I possibly argue that the ECB should not be buying European sovereigns when all the smart and good and wonderful and noble types are telling us that that the only way out of the “Europeans debt crisis” is for the ECB to turbocharge its printing presses and get in their and buy bonds with reckless, carefree abandon? Why, these masters of the universe will argue, the only reason there is a problem is because the ECB has so far bought bonds only haltingly and hesitantly. Oh, yes, the governments should put their fiscal houses in order, perhaps as part of a eurozone wide fiscal compact, but that can come, as an earlier generation of Athenians put it in a completely different context, “some other time.” Right now, though, the smart guys are saying something akin to “Print, baby, print.”

But the Germans, who are counseling caution (until they fold once again, as they have repeatedly throughout this entire tawdry episode) are right. The ECB was, even though not everyone wants to admit it, modeled on the Bundesbank and was designed to share the Bundesbank’s commitment to keeping inflation low and preserving the value of the currency with which it was charged. Its founding treaty, as the ECB admits, forbids funding governments. So why is it holding Greek debt in the first place? It holds some of this debt in connection with its funding operations, in which it takes sovereign debt as collateral. Even this should be suspect, considering the quality of some of the debt it has taken as collateral. But, more importantly, the ECB holds some Greek debt as its part of the effort to navigate the eurozone “crisis;” it has bought sovereign debt in direct violation of its founding treaty. While the learned types urge it to buy more, those of us with an understanding of economics, finance, AND HISTORY would urge it to restore its virtue by immediately ceasing any purchases of sovereign debt and letting the market work things out. Perhaps a punch in the nose, in the form of having to take a hit on its Greek paper, will help the ECB find its treaty and perhaps read it.

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