The European Central Bank's (ECB) decision to accept Greek debt as collateral and introduce a bond purchasing program was not taken fast enough, a panel said Wednesday.
Panellists on Central Banking ON AIR's web seminar on sovereign debt agreed the measures taken by the ECB on 10 May to buy government bonds in response to growing contagion in European markets were "essential" in stabilising markets. They also concurred that the decision to accept Greek debt regardless of its collateral was correct. However, they said had the response been quicker the central bank may have prevented the contagion from spreading earlier.
Mike Williams, a former chief executive of the UK Debt Management Office who is now an independent consultant, said: "The ECB's unlimited guarantee meant the central bank was no longer in control of the situation, instead markets were now running the show."
"They were always one day and one euro too late," Paul Mortimer-Lee, the global head of market economics at BNP Paribas, said. The ECB had, said Mortimer-Lee, failed to "flag up" early warning signs such as the 16 November statement by the Bank of Greece calling for "restraint" in the participation of the ECB's December twelve-month liquidity operations, an indication the Greek government was in fiscal trouble and a statement that stoked market jitters.
"The dynamics of the market are such that if you act pre-emptively, you nick it in the bud," he said, adding that the ECB's unwillingness to do so was further highlighted by its 10 May decision to buy eurozone sovereign bonds only days after its Governing Council meeting, after which ECB president Jean-Claude Trichet said buying government bonds had not been on the agenda.
"It illustrates the ECB's lack of understanding of what's happening in markets and demonstrates a lack of forethought," Mortimer-Lee said.
Philip Davis, a visiting fellow at the National Institute of Economic and Social Research, said the ECB approach to stress testing banks - something that has been successful in the United States - was inadequate. "Central banks should be in a position where banks can be stress tested if necessary, the ECB has neglected to do so," Davis said.
Opinions divided on default
In response to a question on whether Greece could default in an orderly manner, Davis said he had doubts. "The only way it would work is if you are dealing with fewer bond holders," he said.
Williams, however, noted there had been cases in emerging markets like the Caribbean and Uruguay where an orderly restructuring was successful, especially when it is in the best interest of not only the government but the debt holders. However, he said this was more difficult in advanced countries.
Davis then made a comparison between Argentina and Latin American debt crisis, noting that in the Latin American crisis the debt was held by large banks and was easier to manage whereas in the Argentina crisis, like Greece, debt holders are largely made up of individual investors and pension funds and more difficult to negotiate with. He also said Greece had a history of defaulting and it took a long time for them to regain credibility last time they defaulted.
Mortimer-Lee disagreed with Williams, saying that a default would cause a Lehman Brothers-like event. He said it would also have implications on other troubled European countries like Portugal and Spain who have just as high debt-to-GDP ratios as Greece. He added that the three-year IMF programme should be five years' long as this would allow more time for the government to overcome its deficit. Williams agreed that a five-year programme was a good idea.
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