At issue was the buying of sovereign bonds on the part of the ECB.
My point all along has been that there is a huge difference between the Fed’s buying Treasuries and the ECB’s buying sovereign bonds of, say, Greece. When buying Treasuries, the Fed only does monetary easing; it does not acquire credit risk. When buying sovereign bonds of Greece, the ECB does monetary easing as well as acquiring credit risk. It was the latter which prompted me to conclude that the ECB should not buy sovereign bonds of problem countries.
As a reserve currency country, the US has its entire debt in a currency which it can print. Thus, there can never be the risk of non-payment. Thus, the Fed will never have to write-off Treasuries.
Greece has most of its debt in a currency (Euro) which it cannot print. Thus, there is definitely a risk on non-payment. Thus, the ECB may have to write-off Greek bonds at some point in the future. Such write-off’s would trigger a recapitalization need on the part of the ECB. National Central Banks, its shareholders, would have to come up with that capital and they, in turn, would require a recapitalization from their shareholders, ultimately the tax payers of each country. At that point, the buck has stopped with the tax payers.
I was wrong!
There is absolutely no requirement on the part of the ECB to recapitalize should it end up with a negative net worth after a significant write-off of Greek bonds. There is no economic reason why the ECB could not operate with a hugely negative net worth. My friend told me that there are currently several non-Eurozone Central Banks which operate with a negative net worth. He does cede, however, that a negative net worth on the part of the ECB would cause huge political problems.
To make a provocative hypothetical case: the ECB could buy ALL sovereign bonds of EZ-countries and end up holding several trillion of them. Even if all of those sovereign bonds defaulted and would never get paid, the ECB would survive perfectly well. It would simply show a negative net worth to the tune of several trillion.
The only problem would be that the ECB, with those huge losses, could no longer finance its operating expenses out of earnings. Instead, it would require support for that from governments and that is where politicians would try to get the ECB under their direct control.
Ever since my friend left, I have pondered what he had told me. My traditional banker’s brain has tremendous difficulty to understand how it could be that a borrower does not pay its debts but no one suffers a loss?