A few days ago we presented a realistic, if somewhat somber, outlook of what would happen when (not if) Greece finally pulls the plug on its vegetative existence, and its paralyzed body will no longer serve as a breeding ground for maggots of the financial innovation variety. Today, we present a far more comedic one, courtesy of the ECB's Christian Noyer, who makes it all too clear: Europe is not in it to bail out itself and its banks which would topple like a house of undercapitalized, under-MTMed, and uber mismarked cards, but only to protect those poor sad souls of Greece from the "Horror" that would be unleashed when a Greek free fall bankruptcy finally arrives. Truly, the humanist ECB is doing god's work on earth. Try not to laugh while reading this.
From Bloomberg:
The first section constitutes a statement made by Noyer.The remainder is from a question-and-answer session. Noyer spokein French.
“If we restructure Greek debt, that means Greecedefaults.”
“And what are the consequences of a default? The bankswith the most Greek bonds are Greek banks. The Greek banksthemselves will be badly damaged. When the banking system isstricken, what do you have to do to prevent the financing of theeconomy from collapsing? You have to recapitalize the banks. Whowill recapitalize the Greek banking system? The Greek state.”
“That means the Greek state will gain nothing. It willinvest in the banking sector everything that it has gained inthe restructuring.”
“Next there are the Greek insurers and pension funds” whowill be hurt. “That means it will weigh on the Greekpopulation’s savings, which could cause a drop in consumerspending and Greek growth will take a hit. This counters theGreek recovery.”
“Then, what else is there in terms of Greek creditors?There’s the European public sector, European governments and thecentral banks. This is directly tapping the European taxpayer.”
“If we make European states pay, the mechanism of Europeanfinancing will stop immediately. The states will not continueputting their taxpayers’ money on the line when their loans havejust been cleaned out, when they’re taking losses on the moneythey’re lending. So that’s the end of support from otherEuropean states.”
“And for the central banks, what happens? Greek debt willbecome debt that is no longer worth anything. It’s no longerdebt that can be considered as sufficiently safe for operationsin the Euro System. That means by definition that to restructureis to become ineligible as collateral. If it’s ineligible, thenit means a large part of what the Greek banks bring ascollateral for refinancing can no longer be used. That means theGreek banking system can no longer be financed.”
“The next day what happens? Greece needs to find investorsbecause the Greek state won’t move from deficit to surplusovernight. As long as it doesn’t have a primary surplus, theGreek state needs to borrow. International investors, that smallgroup that remains, have just been restructured. It’s not thenext day they’ll come back with financing.”
“The Euro System won’t refinance. The European stateswon’t finance. The IMF won’t go there alone. No one will financethe Greek state in coming years. That means the meltdown of theGreek economy. This is a horror story. That’s why we’re againsta restructuring.”
On rescheduling of debt:
“The lengthening of maturities brings very difficult legalquestions. There’s a strong chance it will be the equivalent ofa default.”
On austerity, asset sales:
“There is another possibility, which is to apply theprogram. To reduce the stock of debt, the only solution isambitious privatization. There is no other solution.”
“When we’re in a monetary union and you need to restoreyour competitiveness, it is necessary to have the equivalent ofan internal devaluation. Cut production costs. There is no othersolution.”
“The budget adjustment that is being asked for -- they’redifficult measures but they’re doable. The IMF has been doingthese programs for years. It knows what is doable.”
“Restructuring is not a solution, it’s a horror story. Youhave to make decisions that are in the interest of the countryand its citizens. The best option is the program.”
“Time isn’t a way of lightening the program. A bit moretime may be necessary. The program might be longer. The measuresare necessary in any case. It’s the same effort over moretime.”
“We won’t convince other European countries or the IMF toprovide support unless there is a strict application of theprogram.”
On the ECB refusing Greek debt as collateral:
“What is the fundamental principle that we have toobserve? We must, in monetary policy operations, refinancing,take sufficient guarantees. All the central banks of the worlddo this. You need good-quality collateral. You set the bar at acertain level. We took a simple rule. You need single-A debt asa minimum.”
“During the crisis, given pressure on assets, we acceptedtemporarily to reduce our minimum level of collateral to BBB.Then the sovereign-debt crisis arrived, the Greek crisis,ratings cuts for Greece.”
“We decided at that moment that when there is a EuropeanUnion-IMF program that we support, we considered” the assets“were the equivalent of BBB. If the program is no longerrespected, if a country is found off track, immediately ourassumption of BBB disappears. If it goes out of the EU program,the collateral is ineligible.”
“If the debt is restructured, you can’t say it’s debt ofgood quality. We need collateral of very good quality [quick someone, what is Greece rated now by S&P/Moody's?]. It’s asimple application of reasoning. Ipso-facto, the collateral canno longer be accepted.”
And the absolutely For The Win:
“Don’t think for a minute that we’re againstrestructuring because French and German banks have Greek bonds.The problem is for Greece itself.”
The ECB would like to thank the academy... and the children. Now, for that Geodon...
h/t Gwilym
View the Original article