Ewald Nowotny , who sits on the ECB’s governing council when not running Austria’s central bank, said this week that selective default by Greece might not have “major negative consequences”.
That puts him in stark contrast to Jean-Claude Trichet, the ECB president, who is dead against banks (including his) shouldering the cost of any write-downs and who says he will not accept defaulted Greek bonds as collateral. But Trichet’s days at the ECB are numbered.
It is possible that much of Trichet’s intransigence is aimed at demanding more commitment from Greece and the EU to make their contribution to Europe’s macroeconomic recovery. But many banks told EuroWeek last week that they see ECB support as a critical pillar in preventing contagion from Greek write-downs or any other cataclysmic events as yet unknown. To know that at least one member of the ECB’s governing council is winking back at them suggestively, if only in the most discreet way, is encouraging news for those hoping for resolution and stability.
It is of course ironic that the banks that made so much money from creating so much debt effectively now need bailing out again. You cannot help but wonder whether, if the incentives to destroy debt existed in equal measure, the world’s financiers would have had the whole debt crisis wrapped up within a week of the first price-wobble in Greek bonds.
That is not the world we live in. In this world profit-driven institutions have become so unwieldy they undermine entire countries and now the single currency and perhaps, ultimately, the EU.
But there was some good news on that front too this week — albeit in as embryonic a form as the Nowotny comments. The Financial Stability Board is about to unleash a consultation paper which will aim to ensure governments cannot be forced to bail out banks. That will serve to separate the evermore entwined finances of sovereigns and banks.
If it is dealt with properly, resulting policy will put the risk firmly back with the fee earners who are paid to bear it and who should live or die by their skill in doing, so rather than with the fee payers who should never have let themselves get into such a vulnerable position.