The ECB Keeps the Politicians Honest

The ECB has always maintained that the EU debt crisis is a fiscal problem requiring a fiscal solution. Monetary policy is the ECB’s domain and they will not deviate policy to afford the EU spendthrifts an easy way out.

The ECB owns the very same Greek debt that the politicians are seeking to force the private sector to write down. As such, the ECB are a thorn in the side since if they insist on full payment then all other bondholders must be paid or Greece defaults. Yesterday, to get around this hurdle, the EU offered to exchange their existing debt for new claims at no loss to the ECB. With the ECB out of the way, the EU could then extort additional concessions from private bondholders…

Well, the ECB said NO on the basis that the bonds are ‘…held for reasons of Monetary policy.’ This is an earth-shattering development and means ‘pay us our money then get lost’. The EU, the IMF and Germany in particular were put on notice that if Greece defaults it would be over the ECB’s dead body. Germany immediately sprang to the ECBs defence blaming the IMF for pushing the suggestion while at Davos, Merkel pleaded for understanding of the political process.

The ECB is championing the cause of the bondholder. Debt writedowns are not the fiscal solution to the deficit spending disease in Europe. Greek bonds traded higher on the news and the debt negotiations magically restarted with the announcement that the IIF’s chief was heading back to Athens today.

Expect a voluntary bond swap deal this Friday.