ECCL+ = Another Eurpean Scam

The reason the European Monetary Union is doomed is its manifest lack of unity.  No matter what confidence scheme it puts forward in order to stem the current crisis, all it takes is a cursory look to reveal a lack of political commitment to debt mutualization and burden sharing.  The one exception to the rule here is the OMT program, but that is burden sharing by illegitimate Central Banker fiat – not by political choice.

ECCL+, or an Enhanced Conditions Credit Line with Sovereign Partial Risk Protection, is no different.  ECCL, as its name applies, is a credit line that an EMU member state can activate with the ESM after agreeing to conditions.  As ECCL is a credit line, or loan, the member state is solely responsible for repayment of the loan to the ESM, which has declared itself to be a senior creditor.

The addition of PPCs, or Partial Protection Certificates, is what differentiates a plain ECCL from ECCL+.  These PPCs would be issued as a detachable instrument to accompany the sovereign bonds.  They would offer to cover 20 to 30% of losses on the principal of the accompanying bonds, but only in the case of a credit event.  Mark-to-market losses are NOT covered by PPCs.   In order to redeem a PPC, the holder would have to demonstrate that they still held at least the amount of bonds the PPC covers. 

As I mentioned, PPCs would only be redeemable as a result of a credit event.  Given that the vast majority of bonds in these sovereigns are local law bonds, a credit event could be quite difficult to generate, as was seen in the recent Greek PSI.  Furthermore, given that many of these bonds are now held in domestic hands, the holders are much more exposed to pressure from their respective governments to cooperate in any restructuring so as to avoid generating a credit event.

But, here’s the best part.  IF a credit event actually does occur, guess who is responsible for paying on those PPCs?  From the guidelines – “The beneficiary Member State will also have to cover any costs related to a protection payment.”  Good luck getting paid on that!