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Concerns grow that Greece debt crisis could overstress European Bank

The Greece debt crisis, which is still subject to German parliamentary approval and may be challenged in court, is putting unsustainable stress on the European Central Bank, some analysts say.

By David Charles FrancisCorrespondent / April 30, 2010

Greek, National Bank of Greece and European Union flags wave at the headquarters of the National Bank of Greece, the biggest bank in the country, in Athens, Thursday. EU and IMF officials say a deal will be in place by the weekend to provide Greece with aid to make upcoming debt payments.

Thanassis Stavrakis/AP

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Berlin

The Greek debt crisis may be turning into a European Central Bank crisis.

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As the European Central Bank (ECB) continues to loan money to keep Greece afloat, the ECB's exposure to the failing economy also grows, threatening potentially backbreaking losses if Greece declares bankruptcy. This is a looming concern as Germany lawmakers continue to balk at a bailout.

The extent of the financial assistance needed by Greece – with Spain and Portugal, both of which also saw their debt downgraded this week, now in similar positions – is placing unsustainable stress on the ECB, says Desmond Lachman, a former managing director at Salomon Smith Barney and current fellow at the American Enterprise Institute.

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“What this has now become is a European Central Banking crisis,” says Mr. Lachman. “The main concern of [EU negotiators] is keeping this crisis from affecting the ECB, and whether continued default [in Spain and Portugal] would affect the bank.”

The ECB already holds tens of billions of dollars in Greek bonds. As it now stands, Greece will not be able to repay the bank for these bonds, let alone the bonds that the ECB continues to buy from Greece to keep it afloat as bailout negotiations continue. This is also the case with Spanish and Portuguese bonds, which the bank also holds.

The ECB has not commented on its exposure to these bonds. Governing Council member Axel Weber said Thursday that the impact of a Greek default would be "incalculable."

Bailout on the way?

European leaders were scrambling to arrange a bailout and quell market panic over Greece’s looming debt payments after Standard & Poor's downgraded the country's credit rating to junk this week.

EU and IMF officials say a deal will be in place by the weekend to provide Greece with tens of billions of dollars in aid to make upcoming debt payments. Time is short because the country has about $11.3 billion worth of debt due by May 19. EU Monetary Affairs Commissioner Olli Rehn said the deal would help Greece while allowing “every euro area member state and their citizens to safeguard the financial stability in Europe and globally.”

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