Global Analysis from the European Perspective. Preparing for the world of tomorrow




How the ECB can dissolve the Greek debt while keeping the full amount on its balance

European Central Bankers should look at their counterpart at the other side of the Atlantic to learn how you can cook the books and solve the problems.
The European Sovereign debt crisis could be solved in the same manner as the US’ Mortgage Crisis.

The ECB is not able to apply a haircut to the Greek Debt because this would erase a part of its balance sheet. The European Central Bank has to dissolve the Greek debt obligation, while at the same time keeping them on their balance sheet.
The FED was confronted with a comparable problem, it started to buy 40 billion dollar Mortgage-backed Securities per month in 2012, while it had already accumulated 834 billion dollar Mortgage-backed Securities. One can wonder if the collateral, the underlying houses of these securities still exists and how bad the cash stream of these securities are.
But given the structure of the MBS, nobody cares.
For the FED it is no problem what the real value of the individual mortgages is, because these securities are mark-to- market and as the FED is the biggest purchaser, it sets the market price. The price of these securities are whatever the FED wants to pay for them when it buys these products and whatever it asks for it if they want to sell them.

The ECB can do the same trick with Greek’s Government Debt, it has to create a so called Special Purpose Vehicle. This SPV has to buy Greek Government Debt from the ECB. The SPV packs the Greek Government Debt Obligations together with some German bonds or other sovereign debt obligations. To fund the SPV, the ECB buys newly created “Sovereign Debt Backed Securities” (SDBS) from the SPV for the same price as they sell the sovereign debt obligations.
As the ECB unloads its Greek Government Debt holding onto the SPV it is protected to a Greek Haircut. The price of the new created Sovereign Debt Backed Securities is hard to estimate based on the value of the underling obligation; The so called SDBS’s has to be valued “mark to market” even as the underlying debt is restructured. As long as the ECB is the main greedy buyer of this newly created product and the sole holder of this product, it can offer and request any price it likes.
Without losing credibility this trick does exactly what it is supposed to do; restructuring Greece’s debt and leaving the ECB balance sheet unchanged.

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