European Central Bank Ducks Covering Greek Bailout Losses

(CN) – The European Central Bank has no obligation to make good on losses suffered by commercial banks following debt restructuring efforts in the wake of Greece’s financial collapse, the European General Court ruled Tuesday.

In 2012 – facing the fiscal meltdown of the Hellenic republic and certain default on previous bailouts – the European Central Bank ordered a number of measures to restructure Greece’s debt. One of those measures involved the bank’s decision to the use of Greek debt instruments that did not conform to credit-worthiness standards as collateral conditional on Greece’s agreement to a buyback scheme with national banks only.

Commercial banks and private holders of Greek debt lost money on the deal and sued the European Central Bank for recompense. They argued the bank’s efforts to restructure Greek debt misled them to have false hope that buying and hanging onto Greek debt instruments was a good financial decision, and said it wasn’t fair that national banks were given a buyback scheme while they were left holding worthless notes.

In a ruling issued Tuesday, the European General Court dismissed the private holders’ demand to recover nearly $12 million in losses from the European Central Bank. The court noted that the bank’s measures did not violate EU law, and that nothing it did was designed to encourage buying up or holding onto Greek debt.

The Luxembourg-based court also said the commercial banks should have known about Greece’s precarious financial situation and the likelihood of default and proceeded with caution.

And the court rejected arguments that the private operators were treated differently than national banks since they weren’t privy to the buyback scheme. While the private banks and investors’ primary purpose in holding Greek debt instruments was to – hopefully – make money, the national banks and the European Central Bank had an entirely different aim: to safeguard the stability of the eurozone and its currency.

The court’s opinion was not made available in English. The private investors have 60 days to lodge an appeal with the European Court of Justice.