Over the past few days the ECB has been spoiling for a fight, arguing vehemently that a write down of 60% was unacceptable. I could not understand their position, at first I thought that ECB was protected, but it turns out they bought ordinary bonds on the market -- so they have to face the same write down as commercial investors. Moreover, it didn't make sense, that the ECB would be against such a necessary move -- Greece cannot support its current level of debt, its a fact.
Turns out the reason for the ECB's position is due to its own viability: Turns out that the ECNB has just a bit more than Euro 5.1 billion in capital. it obtain an increase about 12 months ago (to Euro10 billion), but the money is coming in three tranches... over the 2010, 2011 and 2012 fiscal year. It is also back loaded, so the bulk of the increase is only available in 2012.
Guess what, the write down of Greek bond of 60% would deplete its capital dramatically... the loss for the ECB in a 60% write down (we are assuming that they bought most of that paper at a discount to face value of about 70%), but that cut all the way down to 40% of face value would totally absorb the ECB's equity cushion.
Funny bit of course is that many European corporation have been "stashing" their cash with the ECB -- a sign of weakness of the European financial system -- imagine it is now the ECB that is in trouble. BTW blame leverage, the ECB has a 30:1 leverage (less than DB, Comerzbank, BNP or SocGen -- to name Europe's most leveraged banks).