Forex Trading News – The cost of Greece’s default on the European Central Bank

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The irony is that while Europe is preoccupied with a possible restructuring of Greece’s debt, other risks just a big could just as well arise for the European Central Bank’s balance sheets, since it has taken on billions of Euros worth of risky securities as collateral for loans on behalf of the banks of the debt ridden Eurozone countries.

Many bad loans have now ended up on the ECB’s balance sheet. Since the beginning of the financial crisis, banks in mostly the peripheral countries, namely Greece, Portugal, Spain and Ireland, have unloaded risks amounting to several hundred billion Euros with various central banks in the European Union. They have accepted securities as collateral, many of which are now not as valuable.

These risks are now on the ECB’s books because the central banks of the Eurozone countries are not autonomous but, rather, part of the “Euro- system”, the European central bank system. For example, if banks in Greece go bankrupt and their securities aren’t worth much, the Eurozone countries must collectively account for the loss. Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses.

If Greece defaults, then the failure of such a debt-laden country would almost inevitably lead to the bankruptcy of a few Greek banks, which would create a domino effect. This mean that the ECB’s loss would increase dramatically, because the ECB is believed to have purchased Greek government bonds for €47 billion. Besides, by the end of April, the ECB had spent about €90 billion on refinancing Greek banks.