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The Greek debt crisis may be turning into a European Central Bank crisis.
As the European Central Bank (ECB) continues to loan money to keep Greece afloat, the ECB's exposure to the failing economy also grows, threatening potentially backbreaking losses if Greece declares bankruptcy. This is a looming concern as Germany lawmakers continue to balk at a bailout.
The extent of the financial assistance needed by Greece – with Spain and Portugal, both of which also saw their debt downgraded this week, now in similar positions – is placing unsustainable stress on the ECB, says Desmond Lachman, a former managing director at Salomon Smith Barney and current fellow at the American Enterprise Institute.
“What this has now become is a European Central Banking crisis,” says Mr. Lachman. “The main concern of [EU negotiators] is keeping this crisis from affecting the ECB, and whether continued default [in Spain and Portugal] would affect the bank.”
The ECB already holds tens of billions of dollars in Greek bonds. As it now stands, Greece will not be able to repay the bank for these bonds, let alone the bonds that the ECB continues to buy from Greece to keep it afloat as bailout negotiations continue. This is also the case with Spanish and Portuguese bonds, which the bank also holds.
The ECB has not commented on its exposure to these bonds. Governing Council member Axel Weber said Thursday that the impact of a Greek default would be "incalculable."