Euro politicians play chicken before they kick the (debt) can

06/10/2011 4:01 pm EST


Jim Jubak

Founder and Editor,

The German government and European Central Bank are playing “huhn” with the euro and the Greek debt crisis. With the deadline for coming up with a new “solution” to the Greek debt crisis coming up fast—June 24 is the date that keeps coming up—both sides have stepped up the rhetoric.

German finance minister Wolfgang Schaeuble told German members of parliament today, June 10, that “Participation of private creditors in cases of insolvency is indispensable.”

European Central Bank president Jean-Claude Trichet has not only repeated his statement that the European Central Bank opposes any effort to require holders of Greek debt to participate in any mandatory extension of maturities on Greek bonds, but has turned that opposition into a warning. Not only does the central bank have no intention of participating in any program to extend the maturities of Greek debt, but also in its view, Trichet said, any mandatory extension would trigger a “default” ruling from the rating agencies. That would produce a massive sell-off in Greek debt and make it impossible for Greece to fund maturing debt. And, Trichet added, the European Central Bank would refuse, under those circumstances, to accept Greek government debt as collateral for loans to Greek banks. That, of course, would set off a crisis in the Greek banking sector as Greek banks ran out of cash.

Estimates say the European Central Bank has purchased about $60 billion in Greek government bonds to provide short-term financing to the Greek government. It has also lent close to $300 billion to banks in Portugal, Ireland, and Greece on collateral that includes a large helping of government debt from those three nations.

The euro is down about 1.1% today against the dollar as of 3 p.m. New York time.

Why this escalation of rhetoric at this point? A good part of the reason is the bet by Germany’s leaders that the European Central Bank will chicken out first, as it did just about a year ago—and a belief on the part of the central bank that it can’t compromise this time without doing real damage to its long-term credibility.

In June 2010 Trichet was absolute in his conviction that the bank would never buy the bonds of European governments in the open market in order to support the debt of Greece, Portugal or Ireland. "I would say we did not discuss this option," he told a news conference after an ECB Governing Council meeting in Lisbon.

Four days later the European Central Bank started to buy government debt in the open market and has continued to do so as the crisis continued.

For that I think you can understand why the German government thinks it can get the bank to blink again.

European governments are trying to reach an agreement on a new aid package for Greece

Governments are trying to reach agreement on a new aid package for Greece by the date of the June 23-24 European summit


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