I have written on a number of occasions that the ECB's decision not to participate in the Greek sovereign debt restructuring (i.e. not take a writedown on its holdings) would eventually come back to haunt it in one form or another.
On Thursday, Bloomberg highlighted a law suit brought against the central bank by 200 Italian investors who claim the central bank should have been subject to the same writedowns as private creditors during the March restructuring. From a portion of Accorinti and others v. ECB:
"According to the applicants, it is abundantly clear that the principle of equal treatment has been infringed in the present case since all of them are, in exactly the same way as the ECB and the national central banks, creditors of the Greek State, in that they are holders of the relevant bonds"
The ECB has requested a four month reprieve regarding the issuance of a response due to the fact that the its legal department is, to quote a lawyer cited by Bloomberg, "completely overwhelmed".
Part of the heavy legal load is attributable to the central bank's inquiry into the legality of its new bond buying program. The Bloomberg piece suggests that more legal issues could arise if the central bank takes a supervisory role under a new plan to centralize eurozone banking. While the ECB's potential role as supervisor of all eurozone banks would no doubt add to the legal workload, the Financial Times is probably correct in asserting that the larger issue is the potential for others to come forth and question the legality of public sector seniority in debt restructurings:
"...it's also important when the ECB's seniority remains a live, legally complex issue...if the OMT is...honestly pari passu now...what was the legal basis for SMP seniority in the first place?"
In other words, if the ECB were to live up its promise and "accept the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions", it isn't clear how it could go back and defend its claim to seniority in the case of previous purchases of sovereign debt.
The other question raised indirectly by this case -- and this may be the most important issue of all -- is that of the ECB carrying Greek bonds at par that the rest of the world has written down and indeed may end up writing down again. Central bank or no, those bonds are not worth par.
All of this supports the notion that the more extraordinary the measures the ECB is forced to adopt to deal with the crisis, the more legal issues it will be compelled to confront. This could undermine confidence in the central bank and the currency it prints. This is just one more reason to bet against the euro (FXE) going forward.