Today, the European Central Bank published a legal opinion on their website which expressed concerns over the proposed bank restructuring powers for Ireland’s finance minister. The ECB is concerned they would have to take losses from a restructuring directed by Fin Min Brian Lenihan.
"The ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem," according to Reuters. “The issues include "the scope of collateral rights of central banks given as security against ELA (emergency liquidity assistance)," as well the rights of the ECB and possibly other central banks in the euro zone.
What’s the ECB’s goal: not to take losses on Irish bonds it owns when the other bondholders have to restructure the debt. The ECB is a substantial lender to Irish banks as they have given out 136 billion euros to them….nearly 25% of all outstanding ECB loans.
The Irish finance ministry released a statement saying the both the ECB and their central bank will be protected.
This is what happens during a crisis as the government changes the rules of the game right as you need the protection of those rules. (Just ask US GM bondholders.) The irony is that the action generates more uncertainty and therefore creates the opposite of what authorities want. The market dumps the bonds and, in this case, the stock of those companies involved. Preemptively and presciently, Moody’s downgraded Ireland 5 places on Friday and many were scratching their heads on the timing. Today, the scratching has stopped.
Why is it that when a government intervenes to correct or stabilize, the more the situation becomes unstable? This is why we can expect more uncertainty and instability in the Euro Zone for 2011 as they continue to intervene to fix a system that was flawed at inception.
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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.