The pledge to do “everything to save the euro” accompanied by “and believe me, it will matter” are still echoing and holding the euro above previous levels, despite the doubts.

If the president of the ECB wants to do everything, he could contribute to extinguishing a burning August fire in Greece.

Greece is running out of money

The Hellenic Republic has a bond repayment of over 3 billion euros due on August 20th. Does it have the money? No. The troika is still in Athens, sitting with the Greek government and trying to find ways that Greece can reach some of the targets.

Paying Greece the next tranche of aid depends on Greece meeting its targets, which it missed of course. The money is delayed at the moment.

But who does Greece owe this specific August 20th money to? The ECB.

Talk about a haircut for the ECB has been circulating recently. As part of the second bailout program, private bondholders took huge losses of nearly 75% on Greek debt. The Greek government now owes money mostly to the public or official sector. This is includes the ECB.

The ECB also bought Greek bonds in the markets. When the times came for the bond swap, the ECB was exempt of haircuts. This seniority of the ECB and the subordination of the private sector later backfired as private money fled out of Spain and Italy. The recent EU Summit decided on no seniority, learning some lessons, perhaps too little and too late.

Fixing the seniority issue

Draghi has a chance to fix the seniority error made earlier in the year. He could start by taking a haircut on Greek debt, or at least postponing the payment date.

This would give Greece some breathing space, and open the door for more ECB write-downs. It would also ease the pressure on Spain and Italy, which are struggling to fund themselves.

Like other moves, this might run into German opposition, either from the politicians or from within the Bundesbank, the German central bank.

Draghi and the ECB have a very wide array of options, with a massive bond buying of Spanish and Italian debt strongly desired by the markets. For more, see ECB Preview: Will it Launch Full QE?

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