ECB-EU clash over Greece gets dirty
Lender threatens move which could seriously harm Greek banking system
The European Central Bank has raised the stakes in its bid to prevent a restructuring of Greek debt by telling eurozone governments it would refuse to accept Greek bonds as collateral if they approved such a move.
Greek banks rely on the system of collateral to fund themselves and an ECB refusal to accept government bonds as security would effectively cripple them.
The warning came from ECB Executive Board member Juergen Stark on Wednesday after ECB President Jean-Claude Trichet had made a similar threat at a Eurogroup meeting in Brussels on Monday.
ECB officials have warned for weeks that a debt restructuring would have catastrophic consequences for the eurozone and stepped up their rhetoric this week after Eurogroup leader Jean-Claude Juncker suggested the bloc was open to a voluntary extension of Greek debt maturities.
“For the ECB, according to our statutory obligations, a debt restructuring would undermine the collateral adequacy of Greek government bonds,” Stark said.
“This means that a debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible.”
The ECB has warned repeatedly about the knock-on effects of restructuring and its members have been equally dismissive of the idea of a “reprofiling” in which private creditors would be asked to exchange their bonds voluntarily for paper with longer maturities.
Experts expressed doubts, however, about whether the Frankfurt-based Central Bank would follow through on the threat, and described it as a negotiating ploy designed to halt the momentum toward some form of restructuring.
The Royal Bank of Scotland said yesterday that the ECB could still accept collateral from Greek banks for loans in the event the country restructures debt, contrary to suggestions by Stark.
According to ECB rules, any decision on whether to accept Greek government bonds as collateral from the nation’s banks to obtain ECB funding seems to be “largely discretionary and there is no automatic legal constraint,” Jacques Cailloux, chief euro-region economist for RBS in London, said.
The ECB “seems to have been increasingly sidelined from the political debate surrounding the debt crisis over the last few months,” Cailloux said.
The ECB is concerned that al- lowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Portugal and Ireland, which followed Greece in accepting aid.
The ECB has bought 76 billion euros of bonds of fiscally stressed countries in the past year and may suffer along with private investors in a restructuring.
Staunch opposition to the possibility of a Greek debt restructuring from the Frankfurt-based lender may have already prompted a rethink of tactics by the European Union, which is considering asking private investors to hold Greek bonds and providing Athens with a new package of aid from the EU and the International Monetary Fund.
A eurozone source with insight into European discussions on Greek debt told Reuters yesterday that any “soft” or “hard” restructuring that might trigger a “credit event” – or the payout of default insurance contracts – was now off the table.
Instead of a maturity extension, which might decrease the value of bonds and trigger such an event, banks would be encouraged to maintain their holdings of Greek debt and buy new bonds to replace issues as they matured, the source said.