Perusing the pipes and tubes as usual and I came across an interesting article at Zerohedge, The ECB Has Opened Pandora’s Box.
I am not going to speculate about anything this morning. No guesses about what the Finance Ministers might do on Monday, no simple addition or subtraction that the data used to forecast Greece’s return to a 120% debt to GDP ratio is a falsification of the numbers, no mention that only nineteen cents of any bailout for Greece would actually go to the country; I am not going to discuss anything except what the European Central Bank has actually done and what we now know with a one hundred percent (100%) certainty and the horrifying implications of their actions.
The last bit is particularly alarming. 100% certainty? Horrifying implications? These aren’t nuanced words being used. They are dramatic and, even though I must honestly say I’m not really sure what this is about (ya, I’m ignorant about economic details at this level, I admit it), they bother me. One does not use “horrifying” as lukewarm adjective.
So what’s the deal?
The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued.
Ya, so what? Isn’t this just the standard neo-lib mantra of our contracts are sacred, but yours are toilet paper substitutes (here, watch how I wipe my billion-dollar derriere with your “contract”)?
We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe. If they can exempt themselves from a “collective action clause” then they can exempt themselves from any clause, in any sovereign indenture, for any European country. The fact that they are now clearly senior to any other bond holder, or more aptly put, that any private bond owner is now subordinated to the ECB is one consideration but hardly the most important one. The incredibly grim reality now is that any European and all European sovereign debt can have their indentures changed by the ECB when it is to their advantage.
Ok, that is not good for investors in general. And of course a country’s sovereignty becomes nothing more than rhetorical comedy. Which is what I think he’s saying. But what I think about this and what I know are vastly separated. So to anyone with some econ background, can you please help me understand if this is what he is saying?
It is the “collective action clause” today but tomorrow it could be the maturity or the coupon or any other terms and conditions in an indenture. It is Greece today but tomorrow it could be France or Portugal or Italy. The “Rule of Law” has been abrogated and tossed aside in the name of political contrivance.
Now that’s what it seems like is being said. So basically the ECB gains complete and total control. They never lose. They just change the rules. Right?
Since the ECB can now retroactively change any bond contract to whatever it likes and with any nation in its dominion then the valuation of European sovereign debt must be re-examined for what it really is which is no longer what anyone previously thought. Starkly put; the bonds issued by the sovereign nations in Europe are no longer pari passu, on equal footing, with the bonds issued in the United States. We have just passed a clearly defined “break point” where the legal rules were changed to the great disadvantage of all the private debt holders.
Did the ECB just take over most of Europe, ie. is that the potential future implication? Ok, this may be hyperbolic reasoning. Is it?
The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place.
If investors leave “en masse”, doesn’t signal serious problems for Europe in general? Wouldn’t this loss of investing capital, if they actually did leave, plunge most of Europe into a serious economic crisis, most notably those countries already on the edge?
I honestly don’t know enough about economics to make an informed judgement on this article. But “Tyler Durden” sure does seem pissed. If anyone at FDL with some Econ backgrounds can educate me, and others, as to the true implications of these actions, it would be most appreciated.