Thursday 26 May 2011

ECB's Balance Sheet Contains Massive Risks

http://www.spiegel.de/international/business/0,1518,764299,00.html

They have accepted securities as collateral, many of which are -- to put it mildly -- not particularly valuable.

These risks are now on the ECB's books because the central banks of the euro countries are not autonomous but, rather, part of the ECB system. When banks in Ireland go bankrupt and their securities aren't worth enough, the euro countries must collectively account for the loss. Germany's central bank, the Bundesbank, provides 27 percent of the ECB's capital, which means that it would have to pay for more than a quarter of all losses.

The failure of a country like Greece, which would almost inevitably lead to the bankruptcy of a few Greek banks, would increase the bill dramatically, because the ECB is believed to have purchased Greek government bonds for €47 billion. Besides, by the end of April, the ECB had spent about €90 billion on refinancing Greek banks.

The Emerald Isle experienced an unprecedented boom that ended in 2007, followed by an equally severe crash. Irresponsible real estate sharks, unscrupulous bankers and populist politicians had ruined the country's finances. It was forced to spend €70 billion to support its banks, even as the government itself was all but bankrupt. In November 2010, the Europeans came to the rescue of the Irish with €85 billion from their joint bailout fund. But Ireland is still far from being rescued.

By 2007, German insurance companies and savings banks, in particular, were buying up Irish residential mortgage-backed securities.

According to the Association for Financial Markets Europe (AFME), the face value of asset-backed securities newly launched on the European market in 2010 amounted to a tidy sum of €380 billion. However, the majority of those securities, worth €292 billion, were never offered for sale. Instead, they served one particular purpose: to obtain fresh cash from the central banks.

But if the euro crisis rumbles on, the worst-case scenario isn't all that far away. To ensure its national survival, Ireland should reject the European rescue effort and, instead, accept the failure of its banks as a necessary evil, Morgan Kelly recently said. The renowned professor of economics at University College Dublin knows who would be especially hard-hit by such a step: the ECB.

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