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ANALYSIS - ECB collateral rule major boon for Greece

FRANKFURT (Reuters) - The European Central Bank’s decision to extend its looser collateral rules offers a major reprieve to Greece, ditching the guillotine hanging over the country should it suffer another ratings downgrade.

The ECB lowered its threshold for accepting debt as collateral during the crisis to BBB-, meaning at least one agency must rate debt at this level for it to be eligible, but the threshold had been due to go back to A- at year-end.

Rating agencies Fitch and Standard & Poor’s have downgraded Greece into ‘B’ territory and if Moody’s had followed suit, commercial banks would no longer have been able to exchange Greek government debt for cash in ECB refinancing operations from January 2011.

In a concession to Greece, ECB President Jean-Claude Trichet said on Thursday the ECB would extend its BBB- threshold into 2011, coupled with a new scale of risk margins.

“It shows that they realised the current rules were a Damocles sword hanging over Greece,” said Juergen Michels, economist at Citi in London.

“It is really important they made this statement today to calm markets that are worried about the Greek situation.”


The decision should prevent a sell-off in Greek debt even if Moody’s does downgrade the country, given assets which can be swapped for cash at the ECB are more attractive to investors than those which are not.

It gives a boost to Greek banks but also German and French banks, which also hold a lot of Greek sovereign bonds.

“When a central bank does not accept one country’s bonds, that’s a terrible signal for the markets,” Nomura economist Laurent Bilke said.

The premium investors demand to hold 10-year Greek government bonds rather than benchmark German Bunds fell after Trichet’s announcement.


ECB Governing Council Axel Weber had flagged the idea of coupling a lower ratings threshold with higher risk margins, or haircuts, in an interview with Reuters Insider television earlier this month.

As an extra risk protection measure, when calculating how much a bank can borrow in exchange for some sorts of assets the ECB does not take the full market value of the asset but subtracts a percentage, known as a haircut. So a bank which lodges debt with a market value of 100 million euros might only receive 95 million in liquidity in exchange.

Trichet said the haircut schedule would be “graded”, but gave no details how it would differ from the current sliding scale.

The ECB’s scale for assessing the riskiness of assets has sovereign bonds at one end and asset-backed securities at the other. The range of base haircuts goes from 0.5 percent to 20 percent, with add-ons of as much as 10 percent. Bonds rated BBB- have an extra haircut of 5 percent, introduced at the same time as the temporary relaxation in the collateral rules. ABS is not included in the relaxation.


The ECB had earlier this year rejected giving any “special treatment” to Greece, but after its March meeting said renewed tensions in some financial market segments were a downside risk to growth.

“It looks like what they are saying is that there is a more of systemic risk as a result of the Greek problems,” said Michael Schubert, economist at Commerzbank.


Policymakers including Ewald Nowotny have complained about the power the current system gives to ratings agencies.

“The fate of Greece, and if you are going to be more dramatic, the fate of Europe, depends on the judgement of one rating agency. That is an unacceptable situation,” Nowotny said.

“There was no other way out. You can’t remain in a situation in which Moody’s is the judge of the eligibility of Greek bonds at the ECB, that was just unsustainable,” said Marco Valli, economist at Unicredit.

Reporting by Krista Hughes, Marc Jones and Sakari Suoninen, editing by Mike Peacock