Is the ECB Secretly Bailing out Greece?

As Greece continues to slip further into depression complete with massive unemployment, a credit crunch, and loss of economic confidence, it seems as though the ECB has started to implement a backdoor bailout of the southeastern European nation. As Greece has a $3.7 billion maturing bond on August 20, if they do not reach an agreement with the international creditors known as the Troika and receive the next tranche of the bailout, Greece will be unable to pay this debt off.

The European Central Bank has started funneling money into the Central Bank of Greece, allowing the national central bank to make short term loans to banks. These banks would then take the cheap cash and buy a new issuance of short-term Greek bills, expected to total approximately $4.9 billion. Thus, Greece could pay off the maturing debt and also payments in arrears and remain solvent, or at least buy it a few more weeks to discuss new terms with the Troika.

However, the story gets very sad because of one sticking point: the maturing debt that Greece has to pay off is held by none other than the ECB itself. So, the ECB is funneling money into the Greek central bank to lend to banks to buy Greek bills so that Greece can pay back the ECB. This circular logic is infuriating conservative German politicians and Bundesbankers, who have adamantly defended the ECB's mandate in that it cannot fund sovereign governments' deficits.

Further, the Greek banks who buy the bills can then turn around and use them as collateral at the Greek central bank in exchange for freshly printed euros, which also come from none other than the ECB. Thus, the ECB President Mario Draghi and co. are doing everything in their power to keep Greece afloat and solvent. Thus, it appears as though a Greek exit is far from likely so long as Draghi continues to support the ailing nation.

Draghi needs to be careful not further anger conservative Bundesbankers on the ECB's governing council and also German politicians. Many investors fret over the likelihood of a Greek exit, however it may be that a German exit is more likely, as they would just give up and leave the rest of the member nations to go on without their strongest member. A key leader to watch and listen to over the next few weeks is Bundesbank President and ECB Governor Jens Weidmann, who has staunchly opposed bond buying like many of his German counterparts and forerunners on the ECB's council. It appears as though Draghi's master plan was delayed at last week's ECB meeting due to opposition from Weidmann, and comments from him finally backing such a plan could be earth shattering.

Posted In: NewsBondsForexGlobalEcon #sEconomicsHotMarketsBundesbankdefaultEuropean Central BankEuropean Debt CrisisGreeceInsolvencyJens WeidmannMario DraghiNational Bank of Greece
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