Greek Fire, Part 39

As I mentioned yesterday, with the ratings agencies now saying that they don't buy the notion that Greek debt is anything other than pure junk and that there are critical doubts that the latest round of European Central Bank/German bailouts will actually work, somebody has to eat the scheisseburger on Greek bonds:  either the ECB has to accept the Greek junk bonds, or Germany has to pay up to cover Greece's tab, or the ratings agencies have to lose the rest of their tarnished credibility and pretend Greece is solvent. (or some combination of the three).  If one of the three doesn't happen imminently, then the whole thing blows up like a land mine in a nitroglycerine factory.

Over at Zero Hedge, Tyler Durden thinks it's the European Central Bank that's going to be the loser in this game.

As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."

Germany certainly isn't going to do it.  And the ratings agencies have clearly signaled that they're not going to be holding the bag on this one and say that Greek debt is just peachy keen.   That leaves the ECB as the odd man out.

The net result is that the ECB will ultimately have no choice but to bend its rules unless it wants a freefall run on the global bank, unless it manages to bribe the rating agencies with enough money created out of thin air, to make all the other money printed out of thin air, and soon to be collateralized with defaulted bonds, still valuable. 

Count on this to happen.  Open wide, Jean-Claude Trichet.