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ECB Update: To Keep Easier Collateral Rules For Greece
By Market News International || March 25, 2010 at 13:55 GMT
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FRANKFURT (MNI) – The European Central Bank’s decision to extend
its looser collateral rules offers much-needed assurance that the
central bank stands behind Greece and that the country’s refinancing
future no longer depends on Moody’s rating.
The timing of the announcement is no doubt aimed at calming
jittery markets awaiting a decision — or a non-decision — from
political leaders with regard to Greece aid. It may also be aimed at
stepping up pressure on governments to find a solution by highlighting
the central bank’s concern.
President Jean-Claude Trichet’s comments certainly fulfilled the
first objective, driving the Greece 10-year spread down 3.5 basis points
to 325 basis points above German Bunds.
It is doubtful, however, whether the second objective will be as
easily accomplished. Since Trichet’s surprise announcement, German
chancellor Angelika Merkel stressed again today that the EU Council will
not decide this week on “concrete aid.”
Earlier Thursday, Trichet said, “it is the intention of the ECB’s
Governing Council to keep the minimum credit threshold in the collateral
framework at investment grade level (BBB-) beyond the end of 2010.”
“In parallel, we would introduce, as of January 2011, a graded
haircut schedule, which will continue to adequately protect the
Eurosystem,” he added.
The decision still lacks details, such as the potential duration of
the looser rules or specific haircut sizes. But regardless of these
details, to be announced at the upcoming monthly ECB press conference on
April 8, the decision should have a considerable positive impact.
Following the collapse of Lehman Brothers in autumn 2008, the
central bank lowered its threshold to BBB- from A-. To be eligible as
collateral, a security must have that minimum rating or higher from at
least one rating agency. The ECB had previously planed to revert to the
pre-crisis A- minimum after the end of this year.
At present, Greek debt would still qualify under the pre-crisis
rules, since it has an A2 rating from Moody’s. However, under those
stricter rules, another Moody’s downgrade would have meant that banks
could no longer exchange Greek debt for cash at ECB refi operations.
Since assets that can be swapped for cash at ECB operations are far
more attractive, a downgrade that triggered collateral ineligibility
would likely have led to a more severe selloff of Greek bonds than a
downgrade without such implications is likely to do.
Plans to introduce “a graded haircut schedule” also address a more
structural shortcoming of the ECB’s collateral framework, especially if
the ECB puts no time limit on this decision.
The Greek debacle had exposed the tremendous influence a single
rating agency could have in determining whether Greece — or any other
Eurozone country facing credibility problems in the future — would
qualify under the ECB’s collateral rules.
In the view of Ewald Nowotny, this kind of power was “an
unacceptable situation.” He summarized: “The destiny of Greece and, to
be dramatic, the destiny of Europe, depends really on one rating
agency.”
Today’s announcement is a U-turn from previous declarations by
Trichet that “we will not change our collateral framework for the sake
of any particular country.” The change of heart, coupled with Trichet’s
description of Greek austerity measures as “convincing and courageous,”
shows that the ECB is finally ready to throw its weight behind Greece.
There appears to be a shared sense of urgency among ECB officials.
Lorenzo Bini Smaghi and Miguel Angel Fernandez Ordonez Wednesday
called on governments to devise a more concrete proposal as soon as
possible, ideally at today’s summit. Nout Wellink on Thursday warned of
the potential spillover effect from Greece into other Eurozone
countries.
However, there is not complete accord on the Governing Council
about the best course of action.
After Trichet said he would prefer that the Eurozone solve its own
problems, Bini Smaghi went a step further, warning on Wednesday that
“those who are interested in economic and monetary stability in Europe
should resist the path to the IMF.”
Governing Council member Nout Wellink, in sharp contrast, said
Thursday that he hoped Greek support would involve IMF aid. The latest
reports from Brussels suggest that Wellink could conceivably get his
way.
Though the ECB will have no influence over this decision, it
nonetheless finally decided today to do its part to help Greece
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