February 28, 2012

ECB Rejects Greek Debt as Collateral

Temporary measure taken in wake of haircuts, downgrade

ECB headquarters. (Photo: AP) ECB headquarters. (Photo: AP)

The European Central Bank said Tuesday that, after a downgrade by Standard & Poor’s of Greece’s credit rating to “selective default,” the country’s bonds would temporarily be ineligible for use as collateral.

Bloomberg reported that the ECB would once again accept Greek sovereign debt as collateral once a 35 billion euro ($47 billion) guarantee arrangement European governments accepted takes effect in the middle of March. The central bank also said that in the meantime, any banks affected by their inability to use Greek debt as collateral can turn for assistance to their own central banks’ Emergency Liquidity Assistance plans.

In a statement, the ECB said that it “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurozone monetary policy operations. This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.”

Christian Schulz, an economist at Berenberg Bank in London, was quoted saying, “After the downgrade it was clear this was going to happen. The ECB isn’t going to make an exception to its rule on not accepting defaulted collateral, and this is anyway a temporary arrangement.”

While private creditors accepted a hefty write-down on the value of Greek bonds, accepting later-maturity, lower-coupon bonds in exchange for the ones they already held so that Greece could reduce its debt ratio, the Greek bonds held by the ECB were subject to no such write-down.

Although the ECB also exchanged its Greek sovereign debt holdings for new ones, those new bonds were not subject to the same terms as those of other bondholders. This has the effect of exempting the ECB from the write-down and positioning it as senior to all other debt holders–a special provision that many in the industry see as opening the door to a backlash and making other investors reluctant to buy sovereign bonds.

Some market experts were irate at the arrangement. Stuart Thomson, who helps oversee $121 billion at Ignis Asset Management in Glasgow, Scotland, was quoted saying, “It’s the subordination of capitalism. Governments raise money to grow their economies. If that fundraising is subject to governments changing the rules as they see fit, then that’s a subordination of the capitalist system.”

However, not everyone sees it that way. Jim Reid, a strategist at Deutsche Bank in London, said in the report, “Bondholders have to be slightly careful what they wish for. If the ECB wasn’t buying, if there wasn’t official involvement, those countries [peripheral countries with debt problems] couldn’t fund at all. It’s better to be subordinated than to not have them buying bonds.”

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