By Paul Carrel
FRANKFURT Feb 28 The European Central
Bank announced on Tuesday it would no longer allow borrowing
against Greek government bonds, a temporary move that will force
Greek lenders to turn to their national central bank for
While such downgrades were expected, S&P moved before the
euro zone could activate a deal to offset the impact of the
ECB's obligation to temporarily suspend the use of Greek bonds
as collateral in its funding operations.
The plan is for Greece to receive 35 billion euros ($47
billion) worth of support from the EFSF, the euro bloc's rescue
fund, to back central bank lending against Greek government
bonds and other assets underwritten by Athens.
But with this arrangement not yet in place, the ECB said on
Tuesday national central banks would have to help banks through
"emergency liquidity assistance" (ELA) until the 35 billion
collateral enhancement scheme is activated, at which point Greek
bonds would again be eligible in principle.
"This is expected to take place by mid-March 2012," the ECB
said in a statement.
A senior Greek banker said the only access for banks during
this period will be the Bank of Greece, which will expand the
ELA facility to accommodate liquidity needs until the European
Financial Stability Facility money is available.
That the euro zone's deal makers and the ECB did not foresee
the potential risk of the EFSF support scheme not being
activated in time is likely to leave some with red faces.
The issue is vital because Greek banks would almost
certainly go bust if their central bank funding was withdrawn.
Other banks in countries like France also own large chunks of
Greek debt, though they have other assets to use as collateral.
" The decision of the ECB to suspend
temporarily Greek bonds as collateral has no impact on French
banks, " a Bank of France spokeswoman
The timing is particularly awkward for the ECB,
coming just a day before its eagerly-awaited second, and
expected to be final, offering of 3-year loans - a major
crisis-fighting policy tool.
The ELA is effectively underwritten by the states in which
it is extended, putting more pressure on the finances of euro
zone countries whose budgets are already strained.
The ECB requires guarantees in the form of eligible
collateral from all banks that seek central bank funds in its
S&P's downgrading of Greece could well be short but there is
a risk Athens falls back into default later, S&P analyst Moritz
Kraemer told Reuters Insider television.
"It's a distinct possibility that this will be a short
default which will be cured," Kraemer told Reuters Insider in
London. "The more interesting question is not when it will be
cured but whether it will be the last one."
"I think the rating coming out of default of the Hellenic
Republic will give some indication of what the likelihood of
another restructuring down the road would be," he added.
When assessing what rating to give Greece in the future, S&P
would look at the political environment, the growth outlook and
the remaining debt stock.
"We think that on all three fronts there are huge question
marks," said Kraemer.
Commerzbank economist Michael Schubert said the collateral
enhancement plan was implemented too slowly.
"We do not know what they'll accept as collateral, but the
spirit of emergency liquidity assistance is to bridge a
short-term liquidity squeeze, so in principle it is the ideal
instrument," he added.
For an ECB statement on the suspension of Greek bonds as