Tuesday, April 27, 2010

Is the ECB broke?

The ECB will not disclose its exposure to Greek government collateral, but, according to Moody's, Greek banks had about EUR 70 billion in ECB funding at the end of March. 

That's an interesting number because the total equity in the consolidated Euro System is--wait for the answer!--EUR 70 billion. 

So when Greece defaults and Greek banks fail to post additional collateral, will the ECB decide to (a) disclose its exposure and (b) mark down its exposure? Could this make the ECB insolvent? Probably not.

Does it matter whether the ECB is solvent? The answer is: practically, no, unless third parties decide to care, which they shouldn't. The ECB has an unlimited ability to create money, whether it is solvent or not. 

But it would be ever so slightly embarrassing to the Jean-Claude Trichets of this world if the ECB needed to raise equity.

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