It came as a nasty surprise portraying how little Spanish bankers are aware of what is going on inside the ECB. They now realise the damage suffered for failing to secure a chair in the internal governing board. Nominating a lame duck candidate for the office amounted to an unmitigated blunder. The government’s insistence on backing a legal advisor to replace González-Páramo, a seasoned economist commanding widespread respect, led to downright failure. Now it is too late for mending up past errors.
This episode also shows how Spanish bankers can delude themselves in taking for face value messages coming from their authorities. Applying haircuts to sovereigns in order to gauge their risk exposure, would certainly wreak havoc on vulnerable countries. However, it does little sense to treat German bonds on the same footing as those issued by Italy or Spain. After all, the asset quality review should provide a fair and accurate picture of the balance sheet real value.
Should the ECB refrain from penalising such risky assets, in an attempt to prevent adding pressure on feeble sovereigns, its supervisory independence would be at stake. It is by no means an easy decision to take. Yet, failure to do so could severely jeopardize its credibility.