ECB FOCUS-Greek moves reinforce life support role for ECB

By Marc Jones

FRANKFURT, May 3 (BestGrowthStock) – The European Central Bank’s
decision to accept even junk-rated Greek bonds finally removes
the threat of a funding crisis among Greece’s banks and
reinforces the ECB’s role as crisis-time lender of last resort.

The ECB said on Monday that in the case of Greece, it would
do away with rules requiring government-issued or underwritten
debt to be rated at BBB- or higher by one rating agency for it
to be swapped for ECB loans.

It is the second time in six weeks the ECB has changed its
rules to try to douse fears that the country’s debt problems
will spill over into a full-blown crisis, including in the Greek
banking system.

The country’s debt woes have already seen the private sector
largely halt lending to Greece’s banks, leaving them heavily
dependent on ECB loans for survival.

The new collateral rules will preserve that life-line. “It’s
a huge move for Greek banks,” said Fortis Bank economist Nick
Kounis. “There is no question, Greek banks are
disproportionately large users of the ECB’s facilities and we
also know that right now they do not have access to wholesale
funding markets.”

ECB Governing Council member Athanasios Orphanides said
Greek banks’ difficulties in accessing wholesale funding was not
their fault, since bank fundamentals were sound.

“The system was in a very good condition, but because of the
problems in the Greek public sector, the banking system in
Greece started having problems in drawing liquidity from money
markets of late,” he said. (For story click [ID:nLDE6420M8])

The ECB gives no breakdown of how heavily Greek banks borrow
from its operations or what amount of Greek sovereign debt is
used as collateral for ECB loans overall.

Millennium Bank-Greece Treasurer Panagiotis Dimitropoulos
said Greek banks have 40-45 billion euros of Greek government
bonds on their books. Most economists believe almost all of that
will be part of the central bank collateral pool at present.

The ECB’s move removes the chance that banks would have to
replace those bonds with other debt if Greek bonds were
downgraded further and dropped out of the eligibility pool, and
recent figures from the Bank for International Settlements show
that other countries’ banks will also benefit.

Its latest data shows that European banks have combined
claims on $188.6 billion of Greek debt. Within that French
banks have $75 billion, next in line are German banks with $45
billion while Dutch banks have $11.9 billion of Greek debt.

“The ECB decision makes things easier for Greek banks and
the government, it is a vote of confidence no matter what credit
rating agencies have to say,” said Gikas Hardouvelis, economist
at EFG Eurobank.

“It facilitates not only Greek banks, which hold around 15
percent of Greece’s outstanding debt, but foreign banks as well
which hold part of the rest.”

IN LINE WITH AID PACKAGE

The threat worrying the ECB is that a collapse of Greek
banks could take down the rest of the region.

The move shows the ECB is trying to draw a line under the
problems. It also dovetails with the massive European Union and
International Monetary Fund aid package finalised over the
weekend. [ID:nLDE6400CL]

“This is basically telling us that no euro zone country will
have its sovereign debt excluded from ECB refinancing
operations,” said Fortis’s Kounis.

“Europe is coming together and they see the threat of a kind
of European Lehman event if there was to be a Greek default. The
ECB is doing its bit by making sure Greek debt continues to be
as liquid as possible.”

Parallel political pressure to stop the rest of the banking
system deserting Greece [ID:nVIE003532] means support for Greek
banks now includes three main elements:

* The ECB will be able to provide extra liquidity to the
banks by accepting Greek government bonds as collateral.

* The IMF and EU will guarantee banks remain adequately
capitalised even if an expected rise in loan losses materialises
as a result of austerity measures.

* The private sector effectively promises not to free-ride
on the deal by keeping its credit lines open to Greece and
rolling over existing loans.

The model and the burden-sharing it involves resembles last
year’s bailout of eastern Europe, where the ECB also secured
liquidity, foreign banks’ home countries provided capital and
banks refrained from pulling out of the region.

A crucial difference, however, was that the private sector’s
pledge covered their own subsidiaries in the region, raising the
incentive to make good on it. It may be harder to justify
keeping that promise to shareholders this time around.

DESPERATE TIMES

The ECB’s sudden, Greece-specific decision raises further
reputational questions for the ECB. It completes a full U-turn
on promises to re-tighten lending rules at the end of the year.

“It seems like emergency action, it’s a tough decision. The
ECB is abandoning its hitherto upheld principles. It shows the
situation has become very, very severe,” said Barclays economist
Thorsten Polleit.

“The message is clear. They want to give (banks) the
opportunity to monetise Greek debt.

But others said the move was a sensible one that reinforced
its role as crisis lender of only last resort.

“Desperate times call for desperate actions, and today’s ECB
decision is one step in the right direction,” said RBS economist
Jacques Cailloux.

Investing Analysis
(Additional reporting by George Georgiopoulos in Athens and
Boris Groendahl in Vienna; editing by Tony Austin)

ECB FOCUS-Greek moves reinforce life support role for ECB