Europe’s central bank could be forced to recapitalise in the event of a default by Greece, Ted Scott, the director of global strategy at F&C Investments, says.
In a new note, Scott points out that the European Central Bank attempted to help beleaguered countries on the eurozone periphery by purchasing bonds on the open market.
It also waived its requirement for investment grade sovereign debt as collateral and acted as an emergency funding provider for banks.
But Scott (pictured) argues that this has led to the ECB “sacrificing its own reputation, credibility and principles of sound money” while trying to contain the debt crisis – which continues to spread despite the bank’s efforts.
“The reality is that, with the periphery countries it is trying to provide assistance to, the ECB has become so embroiled in the crisis that its own assets and capital have been severely weakened,” the strategist says.
Illustrating this, Scott notes that the bank has bought around £39 billion of Greek bonds since country’s debt crisis started, while it has loaned €90.4 billion to the Greek banking sector. This has “greatly weakened its own balance sheet”, he adds.
In the event of a default by Greece, the eurozone’s 17 national central banks may need to recapitalise the ECB, Scott warns.