ECB temporarily refuses to allow Greek bonds to be used as collateral

By Simon Morgan, AFP

FRANKFURT — The European Central Bank said on Tuesday it will temporarily refuse to accept Greek bonds as collateral, but any banks hit by this could borrow cash from national central banks instead. The ECB said in a statement that Greek bonds could no longer be used by banks in the eurozone as collateral for ECB loans following the announcement by rating agency Standard & Poor’s that Greece is in “selective default.” The ECB’s governing council “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in eurosystem monetary policy operations,” the statement said.

“This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.” On Monday, S&P declared Greece in “selective default” after banks agreed to write off more than half of their Greek debt holdings in a second EU bailout of the country. The rating was lowered from S&P’s already junk-level “CC” grade for Greece, which has been seeking to avoid an outright default on its massive debt by negotiating a “voluntary” debt exchange with creditors. Greek banks are particularly big holders of Greek government debt, and are also heavily reliant on refinancing operations by the ECB to stay in business. The ECB move will make it harder for Greek banks in particular to take advantage of a huge cash bonanza by the central bank on Wednesday aimed at averting a credit squeeze in the single currency area. In the second such operation in two months, the ECB is offering as much money as banks want at a rock-bottom interest rate of 1.0 percent for a period of three years. In order to qualify for these ultra-cheap loans, however, banks must put up collateral, including in the form of sovereign bonds. Thus, any banks unable to do so because of the suspension of Greek bonds will still be able to borrow cash from their national central bank under emergency assistance provisions, the ECB said. Furthermore, the Greek bonds would likely become eligible as collateral again in mid-March, when a bond swap deal between Greece and its private creditors had been completed, the ECB added. Analysts said the announcement could have a negative effect on demand for the new auction of three-year money on Wednesday. At the first such auction — known as a long-term refinancing operation or LTRO — in December, some 523 banks lined up to borrow a record 489.2 billion euros (US$655 billion).