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A few smooth words from Christine Lagarde, and public sector involvement in the Greek bailout is suddenly a topic of conversation among Europe’s political elite.We’ve argued that this is a positive development in crisis response, but it comes as no surprise to hear that the European Central Bank is despairing over it.
According to sources cited by Reuters, however, the Bank is becoming more and more convinced that this possibility will become a reality. Many national central banks (which together foot the bill for the ECB) have even begun to think that they will be unable to avoid losses in a Greek debt restructuring.
From that Reuters report:
“The ECB will not take losses on its Greek bond holdings voluntarily … but there is a fierce debate within the ECB on how to handle forced losses,” the source said.
Another source said the bank was holding regular talks on Wednesday and Thursday and aimed to hammer out its position on the losses it should or should not be willing to take on its Greek bonds.
The ECB declined to comment.
The ECB has an estimated €40-45 billion ($52-59 billion) in Greek debt holdings, and is Greece’s single largest creditor.
We’ve been writing about the futility of efforts to avoid a credit event in Greece for a long time, particularly because the size of the Greek CDS market is small and some of its effects have already been priced in.
So we have to ask, what’s it going to be, ECB: credit event or taking losses on Greece?
Regardless of the seeming polarity of choices the ECB has here, investors are sceptical that the central bank will go down without a fight.
“If you’re big enough, you can walk like a duck and not be a duck,” said Ari Bergmann, Managing Principal at Penso Advisers LLC at a conference sponsored by Bloomberg Link yesterday, suggesting that Greece could be too big to trigger CDS contracts. “[When we wrote our first soverign CDS contract] we wrote then that there are 10 to 20 ways of defaulting without triggering a default.”