Joseph Stigltz on the Greek debt crisis

The ECB's stance is peculiar. One would have hoped that the banks might have managed the default risk on the bonds in their portfolios by buying insurance. And, if they bought insurance, a regulator concerned with systemic stability would want to be sure that the insurer pays in the event of a loss. But the ECB wants the banks to suffer a 50 per cent loss on their bond holdings, without insurance ''benefits'' having to be paid.

There are three explanations for the ECB's position, none of which speaks well for the institution and its regulatory and supervisory conduct. The first explanation is that the banks have not, in fact, bought insurance, and some have taken speculative positions. The second is that the ECB knows that the financial system lacks transparency - and knows that investors know that they cannot gauge the impact of an involuntary default, which could cause credit markets to freeze, reprising the aftermath of Lehman Brothers' collapse in September 2008. Finally, the ECB may be trying to protect the few banks that have written the insurance.

Read more: http://www.smh.com.au/business/ecb-angst-on-greek-debt-20120207-1r527.html#ixzz1lhc83GN6