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Wednesday, 7 March 2012

European Central Bank facing "sizeable" possible losses

Should Greece default, the European Central Bank (ECB) would face "sizeable" losses of 177 billion euros, which would amount to over 200% of the ECB's capital base, according to the International Institute of Finance (IIF) in a Financial Times report.  And on top of that, the ECB's need to buy more risky European sovereign debt would increase.

Private Greek bondholders who do not voluntarily agree to swapping their bonds for lesser bonds may have their "haircut" imposed upon them through retrospective Greek "Collective Action Clause" (CAC) legislation which provides for compulsory swaps, to reduce Greece's debt burden.  Any private bondholder with default insurance might weigh Greek default the better option.  Default would trigger full bond insurance pay-out, in contrast to a voluntary debt swap, which would lock in losses up to 73%.

See the Telegraph's "European markets plunge as Greece threatens to default", and the Financial Times' "IIF warns on E1t cost of Greek exit", which I acknowledge.

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