To: The Right Honourable European Central Bank President Dr. Mario Draghi
From: Athinarayanan Sanjeevraja
Date: April 5, 2012
RE: Consent to repudiate collateral bonds of EU members whose credit rating descend below ECB standards.
Suggestion: Good Morning Mr. President. I wish to make comment to the ECB. Last week, you gave consent to the 17 national central banks in the euro system to repudiate collateral bonds backed by the government that have received a bailout from the EU and IMF whose credit rating descend below ECB standards. If I am not mistaken, Ireland, Greece and Portugal are received loans from the EU and IMF to keep their governments afloat. Deutsche Bundesbank and Oesterreichische National Bank are taking advantage of that freedom because of ECB decision to give EU central bankers freedom to repudiate collateral bonds of weak members. I anticipate that more central banks in EU members will take advantage of this freedom. If more central banks repudiate to accept bonds guaranteed by Ireland, Greece and Portugal, then that could push down the price for those bonds as there will be less demand for them. I accept it, firewalls to defend against contagion in sovereign debt markets to lessen the external imbalances in the troubled counties such as Ireland, Greece and Portugal. Is it a right time to put firewalls which addresses the root causes of the crises? Certainly it is not Mr. President. It is my judgment that if you exclusively vanished EU sovereign debt crises, then you can put firewall to defend against contagion in sovereign debt markets for future crises. It will be fine.
In the couple of months back, ECB’s have taken number actions including executing two longer term refinancing operations and lessening collateral rules and reserve requirements have permitted European banks to lock in funding for up to three years, thus, assuaging concerns about their near term prospects. With the benefit of this support, European banks in turn have augmented their holdings of sovereign debt, contributing to lower borrowing costs for some countries. Subsequently, EU leaders, the Greek government and private sector holders of Greek debt are taking steps to put Greece on a more sustainable fiscal path. Its sovereign debt has been substantially lessened, the Greek authorities are intensifying their efforts to execute fiscal and structural reforms. Finally, EU members have accepted a new fiscal compact accord. This accord symbolises positive step toward resolving the fundamental tension intrinsic in having a monetary union without a fiscal union, and this should assist increase the feasibility of the EU member’s economy in the longer term. It is my judgment that austerity cuts are counterproductive and will drive weaker member of the EU deeper into recession. Countries with large current account deficit and excessive public debt must bring in structural reforms and cut spending. European policy makers did a great job which has contributed to enhanced financial markets around the world but recent ECB decision to give EU central bankers freedom to repudiate collateral bonds of weak members. It is absolutely erroneous Mr. President because this could push down the price for those bonds as there will be less demand for them. As a result, this will drive Ireland, Greece and Portugal to a simultaneous solvency crises sooner rather than later.
Thank you for attention.
I am Athinarayanan Sanjeevraja with great respect of you Mr. President.
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