ECB forced into 'U' turn on Greek borrowing: analysts

4th May 2010, Comments 0 comments

The European Central Bank made a sharp "U" turn on Monday in accepting junk-rated Greek bonds in exchange for loans, but made the best of a bad situation for its credibility, analysts said.

The bank took a major step by announcing that it was suspending rules and conditions under which holders of Greek government bonds can use them as guarantees when applying to borrow precious central bank money from the ECB.

The landmark decision came in central bank terminology.

The bank's governing council "decided to suspend the application of the minimum credit rating threshold" on Greek bonds and other debt instruments "until further notice," an ECB statement said.

On January 14, ECB president Jean-Claude Trichet had declared: "We will not change our collateral framework for the sake of any particular country.

"That is crystal clear."

But "clearly, desperate times call for desperate actions, and today's ECB decision is one step in the right direction," RBS analysts said in a research note.

The move allows banks in Greece and elsewhere to keep borrowing ECB funds using Greek government bonds and other instruments as collateral despite their sharply degraded credit ratings.

Standard & Poor's slashed Greece's sovereign credit status to junk levels last week, threatening to cripple the country's chance of avoiding default.

ING senior economist Carsten Brzeski said the ECB decision was good because it took pressure off Greek bonds, but added that "it hasn't done a lot of good" for the central bank's reputation.

"Politics or simply reality has disabused Trichet and the ECB several times," Brzeski told AFP.

In early March, the ECB president said: "I do not believe that it would be appropriate" for the International Monetary Fund to contribute financially to a Greek rescue plan, before being overuled by Europen Union leaders.

Central bank credibility is a crucial asset, and the ECB was forced Monday to change course by the threat of the Greek crisis spreading to other parts of the 16-nation eurozone.

The "pressure of events" pushed Trichet into the about-face, Deutsche Bank economist Gilles Moec noted, while adding that the decision also showed "the ECB is finally much more pragmatic than one might have thought."

"The decision makes complete sense," RBS analysts said, while Dirk Schumacher at Goldman Sachs felt "it's important that the ECB supports the kind of rescue which is underway."

Greece is being crushed by some 300 billion euros (400 billion dollars) in debt, and has run up a public deficit that might have reached 14 percent of the country's output.

On Sunday, European governments finally endorsed a historic 110-billion-euro bailout with the International Monetary Fund, the biggest ever financing for a single country, to save Athens from bankruptcy and shore up the European single currency.

The ECB's move bolsters that decision and was was also designed to prevent fear on financial markets from spreading to other eurozone members, notably Ireland, Portugal and Spain.

The latter two saw their sovereign debt credit ratings cut last week as well.

But Moec told AFP that if the new collateral standards "became the rule, it could become a problem for the ECB and for its image as an anchor of stability within the European financial system."

Germany, which will assume the greatest single share of aid to Greece, about 24.1 billion euros, is now pressing for tighter eurozone regulations, something most economists also say is crucial.

Economy Minister Rainer Bruederle said on Sunday that it was clear "that a case like this can never happen again. We must create rules in Europe that make it possible to act against states' debt crises before they happen."

Schumacher told AFP the Greek crisis "shows that we need a different fiscal framework," and Brzeski added that EU leaders "really need to think of a crisis resolution mechanism."

© 2010 AFP

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