The ECB said in a statement that Greek bonds could temporarily no longer be used by banks as collateral for loans after the rating agency Standard & Poor’s declared Greece to be 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.
The ECB move will almost certainly make it difficult for Greek banks in particular to take advantage of an unlimited amount of ultra-cheap three-year loans being made available by the central bank on Wednesday, in an operation aimed at averting a credit crunch in the single currency area.
But any banks affected by the suspension of Greek bonds would 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 will be completed, the ECB added.
“Marketable debt instruments issued or fully guaranteed by the Hellenic Republic will become in principle eligible upon activation of the collateral enhancement scheme”, as agreed by eurozone leaders last year, “together with a number of other measures aimed at assisting Greece in its adjustment programme,” the ECB said. “This is expected to take place by mid-March 2012.”
In a 237-billion-euro bailout deal last Tuesday, the European Union agreed to provide Greece with up to 130 billion ($174.5 billion) in new financing while representatives of private investors, mostly banks, agreed to write off 107 billion euros’ worth of Greek debt via a bond swap.
The government hopes that nearly all of its private creditors will sign up to the bond swap deal, allowing Athens to impose the collective action clause to force hold-outs to accept the swap and losses as well.
The bond swap was launched on Friday, and is scheduled to be completed around March 12.
S&P said that if the exchange is consummated, “we will likely consider the selective default to be cured and raise the sovereign credit rating on Greece to the ‘CCC’ category, reflecting our forward-looking assessment of Greece’s creditworthiness.”
(source: AFP, Reuters)