ECB-EU clash over Greece gets dirty

Lender threat­ens move which could se­ri­ously harm Greek bank­ing sys­tem

Kathimerini English - - Business & Finance -

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.

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