The news of the Greek default hardly came as a massive surprise, having been years in the making (see Stefan’s blog from 2010) but we have certainly learned a few things, such as the privileged position of the ECB with regard to their holdings of Greek bonds (as I mentioned in a recent blog). Last week’s ECB press conference provided Draghi an opportunity to explain why the institution he heads should have super-senior status. He said the following in response to the question as to why the ECB should be treated differently:
“I can answer saying that the SMP was a monetary policy instrument. So the purchases of Greek bonds done under that program responded to public interest policy – general policy considerations. And as such, they deserve protection. This is one reason. The other reason is that I think the balance sheet of the ECB should be protected, because only through the integrity of the balance sheet of the ECB you can have the ECB independence in pursuing price stability in the whole of the euro area, and price stability is in the interest of all the members. So I think that’s one other reason why this exchange of bonds was quite right to do. But there is a third reason, I think, that people rarely think about this. I mean, we forget that this money is taxpayers’ money. And so the ECB has, in a sense, the duty to do everything to protect the taxpayers’ money that was entrusted with it. So this exchange of bonds was actually the right thing to do from this point of view as well.”
In summary, he stated 3 reasons:
- As this was done in order to promote public interests via the purchase of these securities, no losses should be incurred.
- The ECB needs to be protected, and can not suffer losses as this would damage its reputation and its balance sheet.
- The ECB is acting on behalf of tax payers, and that tax payers should not take losses.
Well, a private sector holder of Greek debt was also:
- Trying to promote the public interest by recycling capital from lender to borrower to finance government expenditure.
- The private lender’s reputation and balance sheet matter to it as well.
- The private sector is also generally a tax payer.
- The ECB can take policy actions without fearing loss.
- The ECB can be complacent about making mistakes as someone else picks up the bill.
- The ECB represents the state and the state should never suffer losses.
Given the ECB’s role as lender of last resort, explicitly to banks and implicitly to sovereign states, it is not surprising that corporate credit is becoming more desired and relatively better rated than many sovereigns and banks where the ECB has the potential to become involved.