Battle over EU financial firewall threatens to derail Greek bailout

At a G20 summit in Mexico in two days the EU will plead for increased IMF contributions by non-euro countries to help shore up a eurozone "financial firewall" seen as vital to protecting Spain and Italy from Greek debt contagion.

The IMF will refuse to make extra cash available to the EU and will threaten to pull the plug on its contribution to Tuesday's €130bn bailout of Greece unless the eurozone creates a €750bn fund, a move opposed by Germany.

In the wake of this week's deal to prevent a Greek default, Olli Rehn, the EU's economic and monetary affairs commissioner, insisted that a plan to merge two eurozone bailout funds was vital over the next 10 days. Mr Rehn is seeking to fuse the existing European Financial Stability Facility (EFSF) fund, worth €250bn, with a new European Stability Mechanism (ESM), to be created this summer and worth €500bn.

"This is very important to show that we have credible instruments to ensure we have financial stability in Europe," he said. "It is also very important to encourage our international partners in the G20 and IMF to move in order to increase the resources of the IMF, which form a global financial firewall but also contribute significantly to the European financial firewall."

The issue will dominate an EU summit in Brussels on March 1 and is expected to spark a major political battle when Germany's parliament debates the Greek bailout in Berlin in next week.

Germany has opposed previous calls to merge the two funds because it will increase Germany's liability and exposure to a eurozone default by 50pc, an issue that threatens a serious Bundestag backlash or revolt against Angela Merkel's effort to get agreement on more aid for Greece.

So Bad I Can’t Think of a Suitable Title

Posted by Ann Barnhardt - February 19, AD 2012 9:12 PM MST
http://barnhardt.biz/
I have been warning my cattle industry clients FOR YEARS to get out of debt as quickly as possible, and not just for the obvious business reasons. I have been telling them that the government WILL NOT HONOR any contracts or terms on mortgages or notes when the system collapses and the banks are all nationalized. Your 20-year note at 5%? Yeah, the government will change that once your bank has been eliminated. Still there are scads of people who simply cannot comprehend a lawless environment wherein there is no rule of law, and thus no recourse of any kind.

Well, maybe you will believe me now, because the European Central Bank has just arbitrarily changed the terms of all of its Greek bonds with zero engagement with the market or any judicial review. They just changed the terms of their Greek bonds with the wave of their hand. In doing this, they have utterly SCREWED everyone else holding Greek paper, essentially making all other Greek bonds worthless with zero salvage value.

The European Central Bank (ECB) is like the Federal Reserve here in the U.S. The ECB loans money by buying bonds of the various Eurozone nations. So in this case, the ECB is “the bank” and Greece is the borrower. When Greece borrows money from the ECB by selling the ECB Greek bonds, there is what’s called an “indenture”. The indenture is the full set of terms associated with that bond instrument, including the maturity date, the interest rate, and any other legal terms of the bond instrument.

What the ECB has done is arbitrarily and unilaterally CHANGE THE INDENTURE TERMS of all of the Greek bonds that it is carrying. Specifically, the ECB has removed the “collective action clause” from the bonds that it is holding - and ONLY the ECB-held bonds.

What is a “collective action clause?” It is a clause that allows a majority of bondholders to agree to debt restructuring terms that APPLY TO ALL BONDHOLDERS. By removing the “collective action clause”, the ECB has set itself above and apart from every other Greek bondholder, and made itself “preferred”, meaning that if there is a Greek default, the ECB goes to the front of the line, gets 100% of the salvage value that may remain on the Greek paper, and everyone else gets NOTHING, simply because the ECB Greek bond position is large enough that it will clean everything out in the salvage, easily. The ECB has, completely outside the rule of law, subordinated every other Greek bondholder.

If they can do this, they can do anything. Any terms on any debt can be changed without notice. It is just a matter of time before the ECB does this with other Eurozone nations, and it is just a matter of time before the Federal Reserve starts doing this here. The entire global financial and economic system, the rule of law, and civilization itself is literally imploding before our very eyes.

Here is the link to the source ZeroHedge.com piece, and a key excerpt.

From ZeroHedge http://www.zerohedge.com/news/ecb-has-opened-pandora%E2%80%99s-box
The ECB has Opened Pandora’s Box
“I believe that banking institutions are more dangerous to our liberties than standing armies. “
-Thomas Jefferson
I am not going to speculate about anything this morning. No guesses about what the Finance Ministers might do on Monday, no simple addition or subtraction that the data used to forecast Greece’s return to a 120% debt to GDP ratio is a falsification of the numbers, no mention that only nineteen cents of any bailout for Greece would actually go to the country; I am not going to discuss anything except what the European Central Bank has actually done and what we now know with a one hundred percent (100%) certainty and the horrifying implications of their actions.

“There are no necessary evils in government. Its evils exist only in its abuses.”
-Andrew Jackson

The ECB, on its own and without judicial or parliamentary review, has swapped their Greek debt for new Greek debt that is not subject to any “collective action clause.” They did this unilaterally and without the consent of any other sovereign debt bond owners of Greek debt. They did this without objection of any nation in Europe. They have retroactively changed the indenture, the contract made by Greece with all of the buyers of their bonds, when the debt was issued. There is no speculation involved in these statements, there is no longer any guesswork on what might be; the ECB swapped their bonds for new Greek bonds with the assent of the Greek government and it is now a done deal.

Having then done this; the implications must now be considered utilizing the clear light of unadulterated reason. The issue now is no longer a one-off Greek issue but a full on ECB issue. We know now that the ECB can retroactively change the rules, change an indenture, so that if the ECB can do this with Greece then it can certainly do it with any sovereign debt in Europe. If they can exempt themselves from a “collective action clause” then they can exempt themselves from any clause, in any sovereign indenture, for any European country. The fact that they are now clearly senior to any other bond holder, or more aptly put, that any private bond owner is now subordinated to the ECB is one consideration but hardly the most important one. The incredibly grim reality now is that any European and all European sovereign debt can have their indentures changed by the ECB when it is to their advantage. It is the “collective action clause” today but tomorrow it could be the maturity or the coupon or any other terms and conditions in an indenture.

It is Greece today but tomorrow it could be France or Portugal or Italy. The “Rule of Law” has been abrogated and tossed aside in the name of political contrivance.

“Necessity; the tyrant’s plea.”
-John Milton
Since the ECB can now retroactively change any bond contract to whatever it likes and with any nation in its dominion then the valuation of European sovereign debt must be re-examined for what it really is which is no longer what anyone previously thought. Starkly put; the bonds issued by the sovereign nations in Europe are no longer pari passu, on equal footing, with the bonds issued in the United States. We have just passed a clearly defined “break point” where the legal rules were changed to the great disadvantage of all the private debt holders. The risk of ownership of European sovereign debt is now infinitely more dangerous in my estimation than it was last week. We still do not know if the IMF will demand and receive the same special treatment but I assert that it no longer matters.

The actions of the European Central Bank are all that was necessary to radically alter the value of European sovereign debt and it is just not me but any number of large financial institutions that are in shock given what has happened with one of the largest and most respected bond investors in the world telling me that “financial repression is the softer word for it.”

Leaving anger and hostility aside; European sovereign debt must now be examined with a new set of metrics. How much yield would investors demand if an IBM indenture, as an example, had language that stated “This indenture is subject, at any time during the life of the bond, to any changes mandated by the Federal Reserve Bank.” Stated another way, what yields would be acceptable to bond investors if there was a Federal statute that said “All indentures in the United States may be changed at will by the Federal Reserve Bank upon their sole discretion.” No “Rule of Law,” no judicial appeal and a fait accompli whenever desired. This is, in terrifying fact, exactly what the European Central Bank has done and if we no longer know what we are buying and if the terms and conditions of an investment can be altered retroactively at will without the consent of bond holders and to the advantage of the ECB then either we should not buy these credits, as in Atlas shrugged, or yields should be in the mid-range of junk bonds because European sovereign bond indentures now are worth no more than the paper on which they are printed.

The European Central Bank, in a very misguided attempt to protect itself, has now opened Pandora’s Box. I doubt if they even realize what they have done; but they will, most assuredly they will. The consequences of their horrendous mistake will soon be upon them as institutions not coerced or forced into buying European sovereign debt will be leaving the playing field en masse as the realization dawns upon investors of just what has taken place. You cannot fool all of the people all of the time and the people that manage money for a living are not a forgiving group when governments try to supersede their lawful rights.

“Unlimited power is apt to corrupt the minds of those who possess it; and this I know, my lords: that where law ends, tyranny begins.”
-William Pitt

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.