In a surprise but welcome move, the ECB Shifts View on Bond Losses.

The European Central Bank, in a sharp turnaround, has advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks, though finance ministers have for now rejected the approach, according to people familiar with discussions.

The ECB’s new position was made clear by its president, Mario Draghi, to a meeting of euro-zone finance ministers discussing a euro-zone rescue for Spain’s struggling local lenders in Brussels the evening of July 9.

The ministers rejected the advice out of concern that financial markets would react badly to the decision. [Mish translation: Finance ministers want to screw the taxpayers to save the wealthy].

Imposing losses on bondholders reduces the amount of money taxpayers need to inject into struggling banks. One euro-zone official said the desire to avoid putting more public money at risk than necessary was one reason behind the ECB’s change of heart since 2010. The ECB’s new stance can also be explained by the different scenarios, including the existence of a bank-restructuring framework for Spain that didn’t exist for Ireland, and the fact that the Irish government, unlike Spain’s, guaranteed much of its banks’ debts.

What’s It Mean?

Take your pick from the following possibilities.

  • Losses at Spanish banks are way bigger than reported by Spain’s prime minister Mariano Rajoy.
  • Losses at Spanish banks are such that they would blow out the entirety of the ESM
  • ECB president Mario Draghi is concerned about a reaction from the German constitutional court 
  • German chancellor Angela Merkel warned Draghi in no uncertain terms that German taxpayers would not pony up any more money for bailouts.
  • ECB has recognized the approach in Ireland was a failure

I suspect all of those are true. I also expect Irish citizens will be hopping mad over how they were treated (as well they should be).

Mike “Mish” Shedlock
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