Understanding Zerohedge Cyprus Quote

Discussion in 'Economics' started by Newmoney24, Mar 23, 2013.

  1. Here is the article:

    what I don't understand is this part below-- how could Cyprus wipe outt he entire equity capital of the ECB?? Couldn't the ECB just print?

    Here is the quote below:

    "However if the country defaults and leaves the European Union then it will matter and matter significantly as the tiny country of Cyprus would wipe out the entire equity capital of the European Central Bank. While it is not a matter of public record it is estimated that Cyprus has guaranteed about $11.6 billion of collateral at the ECB."
  2. It would not look pretty on a financial statement, but there are no major problems if the ECB has negative equity capital.

  3. No because if the ecb has to write down the assets it has to write off the same amount in equity to balance the books. Obviously they cant write down liabilities.

    Negative equity wont be a problem in of itself but the hit in confidence in the ecb could be major
  4. If interest rates rise in the future while the Fed. still holds a huge T-Bond portfolio, then the Fed would also go to negative equity on a mark to market basis (and even on a historical cost basis if it sells off the inventory at a loss).

    People are discussing this because it is a possible scenario if the economy recovers, and it would not look very good on paper, but it would not cause any actual problems.

    Eventually it would likely be recapitalized. Same with the ECB.
  5. I disagree because those are two different situations entirely. If the fed has a loss it will be due to a robust econonic recovery obviously a good thing for the rest of the country. If the ecb goes negative its because they were not able to properly price risk. The whole reason the bond narket has been rallying in the eu is because investors have confidence in the ecb. If they go negative and confidence is lost then there will be major consequences. If investors think the ecb mispriced risk then they will start to go risk off
  6. Well my main point was just that the Fed. may well go negative equity also.

    Interpretations of what that means in each case is in the eye of the observer and views will vary.

    It is true that the ECB bought assets that were of lower quality than what the Fed. has bought. But they did it for good reasons - to save those countries financial systems. This is clearly within the mandate of the ECB. I do not think it was really a case of poor judgment. They were not trying to invest in sure winners or get investment returns.

    So yes it is a cost that they incurred, but I think a necessary one under their mandate.

    Nobody lacks confidence in the ECB. It is more hawkish that the Fed. The ECB has not even cut policy rates to zero yet, and all of their asset purchases were sterilized, unlike the Fed's.

    So I think the risk you suggest of loss of confidence in the ECB is zero, and the market knows this. That is why the Euro is where it is. Still the major rival to the dollar.

    Now, the Eurozone could eventually be jeopardized, but it will not be attributed to ECB excesses. The main critics of the ECB say it not activist enough, if anything.
  7. Please show me where that is in their mandate. One of the restrictions of the ecb is they cannot directly fund governments. I think this cyprus fiasco will pull the curtain and show the ecb really has 0 control over this solvency crisis
  8. Part of their mandate is implicit, just as is the Fed's.

    They never did directly fund governments. They always bought from banks and required good collateral as required on loans.

    The one exception is the ELA which is an emergency program only and limited in time to conform to their mandate. They did stretch that for cases like Cyprus but are now saying they cannot go any further which is the precipitator of the current crisis.

    It is not the ECB's job to have control over this Cyprus crisis because it is more than a solvency crisis. Cyprus needs to realign its economy and its insolvent banks will have to go bankrupt - the existing model was not viable. This is a political issue, not a monetary one.
  9. Exactly my point..."good collateral"...many banks took on similar collateral because the ecb deemed it to be good...now what happens if the ecb says nope jk it wasnt good collateral after all

    It is the ecbs job to take control of Cyprus if you believe that implicit mandate bs. According to you their mandate is to keep the eu together by any means. Even draghi said this.
  10. Well they are intimately involved already in all of Cyprus, Spain, Portugal etc.

    But what they are saying in each case is: We are conditioning further assistance (eg the OMT program) on the countries in question reaching fiscal agreements first with Eurogroup and the IMF. That seems eminently pragmatic and reasonable to me, and a very nice way to coordinate fiscal and monetary policy.

    We have not even attempted any such coordination in the U.S. Bernanke is just writing blank checks with no conditionality on fiscal policy. No coordination at all.

    Which is the better approach?
    #10     Mar 24, 2013