The European Central Bank could be forced to recapitalise if Greece defaults, according to F&C Investments director of global strategy Ted Scott.
In a note published last week, Scott says the ECB’s attempts to help beleaguered countries on the eurozone peri-phery by buying bonds on the open market has “severely weakened” its own balance sheet.
Scott says the bank has bought around £39bn of Greek bonds since the country’s debt crisis started while it has loaned £90.4bn to the Greek banking sector.
He argues this has led to the ECB “sacrificing its own reputation, credibility and principles” while trying to contain the debt crisis, which continues to spread despite the bank’s efforts.
He says: “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.”
Barretts Financial Solutions senior partner Kim Barrett says: “The Greek problem is pretty serious and if Greece defaults on its debt it will create problems for the ECB.
“However, the ECB is almost dutybound to continue to bail Greece out because it has already done it once. The question is how long ECB resources can continue to do this. There has to be a point when economic arguments outweigh the political arguments.”
Last week, Moody’s downgraded the rating for Greek local and foreign currency bonds by another three notches from B1 to Caa1 and assigned it a negative outlook, claiming the country is moving closer to default.