FRANKFURT (MNI) – On top of the E110 billion in bailout funds
approved Sunday, Greece received unexpected support from the European
Central Bank, which announced early this morning it was suspending
minimum rating requirements for collateral eligibility on Greek
government bonds.
The decision ensures that Greek banks will continue to have access
to cheap liquidity and should ease recent market fears of a new
liquidity crisis among Greek banks after Standard & Poor’s downgraded
Greek debt to junk.
For the second time in two months, the ECB turned its back on
previous assurances from its president Jean-Claude Trichet, who said
earlier this year, “we will not change our collateral framework for the
sake of any particular country. Our collateral framework applies to all
countries concerned.”
After the ECB announced in March it was changing plans and would
maintain its looser collateral rules into 2011, Trichet tried —
somewhat unconvincingly — to argue that the decision was not taken
because of the decision in Greece, noting that it did not apply to Greek
debt alone.
Today, however, the ECB dropped all pretense, stating explicitly
that the decision was specifically and exclusively for Greek debt. ECB
Governing Council member Anathasios Orphanides later elaborated that the
issue of suspending minimum rating requirements was not broached for any
other Eurozone country.
This new lifeline to Greek banks shows that the central bank has
learned from its all-too-hesitant response to the Greek crisis and is
now ready to take pre-emptive action. It also raises the interesting and
timely question of whether the central bank is prepared to go even
further if need be.
Orphanides suggested that the decision was also an assertion by the
ECB that it had a better grasp of Greece’s economic fundamentals than
the private rating agencies, and was thus in a better position to assess
the quality of Greek debt.
While applying the looser rules to all Eurozone member countries
would have been more in keeping with the ECB’s reputedly egalitarian
approach, and may have further limited contagion risks, Orphanides said
“Greece is the only country for which this specific issue was raised for
discussion.”
The Governing Council may have feared that extending the rules to
all peripheral countries would send the wrong signal about their risk
assessment. Loosening rules for the entire Eurozone, on the other hand,
would expose the ECB’s balance sheet to unnecessary risks.
Even if limited to Greece, today’s decision confirms that the ECB
is prepared to discard previous commitments if it believes that doing so
serves the greater good.
That raises an interesting question: Could purchases of government
bonds be the next thing on the agenda?
When asked on Sunday about potential quantitative easing plans,
President Jean-Claude Trichet did not exactly issue a resounding denial.
“At this stage, we have absolutely no decision on the purchases of
government bonds,” he said. He clearly wasn’t ruling out the option.
Given that Trichet used the same phrasing in his March press
conference when asked about collateral rules — then announced the
change of course later that month — some ECB watchers may interpret “no
decisions” as pointing to ongoing discussions.
It would be premature, however, to conclude that a bond buying
program is on the near-term horizon. Instead, Trichet may simply have
learned from past experience, when he slammed the door on policy
measures — such as changing collateral for the sake of a particular
country — and was later forced by circumstances to reopen it and
wriggle uncomfortably through it.
The purchase of government bonds is likely to face heavy resistance
from Governing Council members who fear violating the ECB’s mandate.
Given current economic conditions, such resistance is unlikely to come
only from the Council’s super-hawks.
With Eurozone HICP rising recently and inflation risks balanced or
even pointing slightly upward, the ECB can hardly argue that government
bond purchases are aimed at countering deflation risks and ensuring
price stability.
It would be hard to interpret a government bond purchase program at
the current juncture as anything less than a direct monetization of the
fiscal deficits run by Eurozone governments. This would represent a
serious breach of the Stability and Growth Pact, which the ECB
ceaselessly urges governments to respect. It would undoubtedly face
heavy opposition from the Bundesbank, and probably other national
central banks.
Today’s decision to suspend minimum rating standards for Greece has
highlighted what Trichet and his Council colleagues have learned the
hard way: never say never. However, the crisis would probably have to
take another sharp turn for the worse, with real contagion risks, before
the ECB dropped its resistance to government bond purchases.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
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