Euro Area

[gaelic cowboy]

Nope because, as you explain: "the colateral put up by the Greek farmer for his tractor is now worth less that the value of the loan". The others then stump up to cover the loss as as % of funds in the ECB (in the ideal world). Of course realistically asking Spain and Italy to pay more to cover someone elses 'tractors' will only cause a worse problem for them.

The loss is born by the Bank of Greece and the local bank as thats where the loan is, lets remeber this fictional tractor has already been bought and paid for so the Germans are actually in the clear. It's the ECB and the Bank of Greece that have to worry about the credit worthiness of the loan basically I have yet to see someone who sold a house ending up with less because the guy they sold it to is in negative equity.

The only time where everyone has to stump up is if someone leaves the Euro.

It can't 'print the money' by it's rules, nor can it lend directly to Governments. That was what the LTRO was about: Trying to fund the banks so that they could purchase the sovereign debt. It worked (for a while).

This wouldnt be lending to governments it would be lending effectively to national central banks which essentially are the ECB through the various board members. So unless said printing is blocked by a vote at ECB board level I dont see how the ECB could go broke.

Look my friend as you most correctly explain the value of the tractor 'loan' diminishes should Greece devalue and return to the Drachma; indeed all Greek Target2 debt devalues. The ECB then "may require all member states to pay for the shortfall as per there share of the overall ECB". You want to ask Spain? Might not be wise right now...

Indeed which is why nobody will either be forced or choose to leave in fact.

So yes the ECB loses but so do the contributors to the ECB proportionaly (as you say). Ergo who loses most? Germany.

How can Germany lose though your original assertion was that Germany is OWED money when in fact they have really been paid. The only thing they have to worry about at all is that no one leaves and if they do there target 2 is larger than there share. Now this essentially means Germany must have a contiually weak Euro to ensure continued trade with EZ economies, naturally this kills the other economies through deflation requiring bailouts.

This essentially is a ponzi that eventually has to end but it's not clear that German politicians have woken up to that fact or that they have adequetaly explained it to there voters. Essentially all those pension funds and financial products that chased returns all over the EZ will eventually have to face the loss.

Otherwise they will sink there own currency