The ECB is an “enormous bad bank” that holds securities which expose it to downside scenarios across the eurozone, according to Der Spiegel.
The ECB has been active in supporting both fringe eurozone states, and their banking systems. In the process it has accepted collateral to do so, including sovereign debt and asset backed securities.
It’s the asset backed securities that alarm Der Spiegel the most:
In other words, ECB President Jean-Claude Trichet doesn’t even know exactly what kinds of risks he is taking on. In principle, the conditions for ECB investment grade securities are outlined in a 37-page document, most recently updated in February. To keep the risks for the central banks within reason, some of the haircuts on securities are very high, comprising up to 69.5 per cent of the value of a security.
However, the degree to which individual central banks strictly adhere to these rules varies. This leads to irregularities which should not occur in a bank, let alone a central bank.
For example, Depfa Bank, the Irish subsidiary of the scandal-ridden German bank HRE, had 78 securities placed on the ECB’s list of investment grade securities in February. According to documents SPIEGEL has obtained, 25 of those securities appear not to have been discounted sufficiently.
This goes a long way toward explaining why Jean-Claude Trichet stormed out of a meeting with eurozone leaders when a Greek restructuring was discussed. For Trichet, a restructuring would mean the end of the ECB accepting collateral from banks in Greece. However, the bank already has a significant amount of Greek securities on its books. In total, according to Der Spiegel, Spain, Portugal, Ireland, and Greece have liabilities of €340 billion to the eurozone system.
The ECB could be left holding a great deal of securities, asset backed and otherwise, that become worthless. The central bank would then be in need of a costly bailout from eurozone states, such as Germany, which may balk at the cost.