ECB Rejects Greek Debt as Collateral

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.”