Recent fiscal problems in the European Union (EU), and in particular the sovereign bond transactions by the European Central Bank (ECB), have placed a spotlight on the ECB’s role at the center of the monetary authority of the Eurozone (the Eurosystem) and its preferential position in the Greek bond default. The ECB has forged a new and still evolving mission of bond market interventions to stabilize, or perhaps destabilize, the prices of sovereign bonds issued by Greece and other members of the Eurosystem.

This newsletter describes the ECB and its functions, defines the ECB’s role with relation to the national central banks (NCBs) within the Eurosystem, and outlines how these organizations have responded to the Eurosystem’s sovereign bond crisis. Along with these institutions, the newly established European Financial Stability Fund (EFSF), the European Financial Stability Mechanism (EFSM), and the European Stability Mechanism (ESM) are designed to play a central role in providing future financial assistance to Eurosystem member countries. With this framework established, we show how the ECB’s actions in this spring’s Greek bond restructuring affected the price of bonds held by private investors. Disputes engendered by the debt restructuring executed by Greece will likely generate substantial activity in international arbitration forums and other legal arenas.

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The European Debt Crisis and the Role of the European Central Bank