This article forbids the direct purchase of government bonds by central banks in the Eurosystem.
Before or after the vote it could easily be the trigger for technical Greek suspension from the Eurosystem.
Bank of Greece's liability to the Eurosystem of central banks rises 1000 euros.
That is not what anyone could consider a prudent mix of Eurosystem assets, nor a promising way to promote economic growth.
If default on deposits is to be avoided, this would require a massive injection of central bank funding by the Eurosystem into these countries.
The balance sheet for the whole Eurosystem (including all the national central banks) shows almost half a trillion euros in capital and revaluation reserves.
FORBES: Revised TARGET2 Paper & Implications for ECB of Cyprus Exit
Also, the ECB is not the same thing as the Eurosystem.
FORBES: Revised TARGET2 Paper & Implications for ECB of Cyprus Exit
The Bank of Spain now has a claim of 1000 euros on the Eurosystem of central banks (as a whole, not merely its Greek counterpart).
More importantly, the risks associated with the bond-buying program are in fact shared across the ECB and all of the national central banks in the Eurosystem.
So people who worry about the Eurosystem needing to have assets that back its liabilities (not me, as you can see if you read the paper).
FORBES: Revised TARGET2 Paper & Implications for ECB of Cyprus Exit
The immediate problem is that markets lack confidence that the European Central Bank (ECB) or any other European institution will provide the ultimate backstop for the eurosystem.
But, as I pointed out yesterday, the amount the Eurosystem could lose if Cyprus defaults on its TARGET2 liabilities is a good bit larger than this figure.
While it was legal for the Eurosystem to loan money to the IBRC, it was questionable as to whether it was receiving the same treatment as other banks.
The ECB releases a Eurosystem financial statement every week.
These figures show the Eurosystem would have to incur much larger losses on its bond purchases than is often believed before the question of insolvency would become an issue.
The problem in the Eurozone is that with cash flight out of Greece, or out of the banking system into the mattresses of Attica, pumping money into the Eurosystem does not equal reflating the periphery.
For as long as it lasts, sterilization means that as the ECB buys more GIPSI sovereign debt, it will be shrinking Eurosystem credit to other borrowers, namely to private borrowers and to less-irresponsible sovereign borrowers.
Consolidating everything, the only interest cost associated with the outstanding ELA debts stem from the fact that the Central Bank incurred a large Intra-Eurosystem liability via the TARGET2 system when the IBRC depositors and bond investors were paid off and moved their money abroad.
FORBES: How Much Would Ireland Benefit from Replacing the Promissory Notes with a Long-Term Bond?
Owen points out that the Greek central bank significantly hiked the amount of liquidity it pumped into the economy in May (ready money) by 10bn euros - and that this would have been provided effectively by the German central bank as part of the Eurosystem.
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