ECB’s Constancio open to Vienna-style Greek deal

By Paul Carrel and Sakari Suoninen

FRANKFURT, June 15 (Reuters) – The European Central Bank could accept private sector involvement along the lines of the “Vienna Initiative” to address the Greek debt crisis, ECB Vice President Vitor Constancio said on Wednesday. Under the “Vienna Initiative” for central and eastern Europe, international lenders agreed in 2009 to boost credit to the region and the main commercial banks in turn committed to maintain exposure and roll over credit lines. “We are not against all forms of PSI (private sector involvement) … some sort of Vienna-type sort of initiative could be conceived — several of us have said. But no more than that,” he told a news conference after presenting an ECB report on financial stability.

“It would have to be clearly voluntary in such a way that it would not be qualified as either a credit event or a rating event,” he added.

Constancio said that under a rating event, rating agencies would classify Greek debt at “selective default”.

Rating agency Fitch said on Wednesday it would likely view a Vienna-type Greek debt plan as a distressed debt exchange, leading to a ratings cut. [ID:nLDE75E181]

“Assuming there is an announcement of the Vienna Initiative ahead of the pre-commitment formalities being completed, Fitch would likely downgrade (Greece) … to ‘C’ at this time, reflecting an imminent default event,” it said in a statement.

In its twice yearly Financial Stability Review, on which Constancio was briefing reporters, the ECB said the euro zone debt crisis risks sparking a destabilising chain reaction through the bloc’s financial sector. [ID:nLDE75E14V]

“The interplay between the vulnerabilities of public finances and the financial sector, with their potential for adverse contagion effects, arguably remains the most pressing concern for euro area financial stability at the moment, despite several encouraging signs of containment,” the ECB said.

 

NUCLEAR OPTION

The ECB is concerned that any form of sovereign debt default could spook markets and trigger another Lehman-type crisis in the euro zone, pushing up bond yields for countries like Spain.

The central bank has even threatened to use its so-called “nuclear option”: refusing to accept restructured Greek bonds as collateral in its lending operations, a scenario that would cut off funding to much of Greece’s financial sector.

Asked what Greece would need to do for securitised privatisation revenues to be accepted as collateral by the ECB, Constancio told Reuters Insider television: “They would have to have a sufficient rating.”

“But I didn’t hear about any concrete proposals in that respect so far,” he added. “It’s something that, as far as I know, is not on the table now.”

ECB President Jean-Claude Trichet last week endorsed privatisation as a way to help Greece out of its debt crisis, saying he was sometimes surprised by the narrow view of the debate on Greece.

ECB policymaker Juergen Stark has also hinted there might be changes to the central bank’s collateral framework. Asked by Insider last week whether lenders would be able to offer up something other than bonds to the ECB as collateral, he said: “This is not excluded.”

Constancio said that while there was some risk of contagion to other countries, markets had put a clear marker between the three countries with EU/IMF aid packages — Greece, Ireland and Portugal — and the rest.

“There is a very clear-cut distinction between the three countries and all the others,” he said. (Additional reporting by Adrian Murdoch; Editing by Ron Askew)