UPDATE 3-ECB will accept even junk-rated Greek bonds

* ECB suspends its rating threshold for Greek bonds

* Move avoids Greek debt falling off collateral list

* Keeps credit flowing to Greek banks

(Adds Orphanides quotes)

By Marc Jones and Krista Hughes

FRANKFURT, May 3 (BestGrowthStock) – Indebted Greece was given a
further shot in the arm on Monday when the European Central Bank
said it would accept all Greek government bonds as security for
loans, even if their credit rating continues to fall.

The ECB’s move to suspend its minimum threshold for Greek
debt means the bonds will remain eligible as collateral for
loans even if ratings agencies Moody’s and Fitch follow Standard
& Poor’s and downgrade Greece to junk status.

The decision, the second change to the ECB’s borrowing rules
in less than two months, will guarantee Greek banks’ access to
cheap central bank funding, and analysts said it should also
help increase Greek bonds’ attractiveness to investors.

It comes after the European Union and the International
Monetary Fund announced a 110 billion euro ($146 billion) aid
package for Greece on Sunday, coupled with spending cuts and tax
hikes. [ID:nSGE642070]

The ECB said in a statement that it was satisfied with
Greece’s new savings measures and suspending the BBB- threshold
— which still applies to other debt — was a recognition of
Greece’s efforts and the coming aid package.

“The Governing Council has assessed the (Greek debt cutting)
programme and considers it to be appropriate,” the ECB said.

“This positive assessment and the strong commitment of the
Greek government to fully implement the programme are the basis,
also from a risk management perspective, for the suspension
announced herewith.”

Asked if the ECB would allow a similar exemption for
Portugal, Spain or Ireland, ECB Governing Council member
Athanasios Orphanides said only Greece was discussed.

“Greece is the only country for which this issue was raised
for discussion, as the assessment was made for a specific
programme of consolidating public finances,” he told a news
conference on the release of the Cypriot central bank’s annual


The move ensures Greek banks will continue to have access to
liquidity even if they cannot access funds in wholesale markets.
“They want to make sure that the question of Greek banks
(having) access to liquidity will not be an issue in this
crisis. It’s one less thing to worry about,” Goldman Sachs
economist Dirk Schumacher said.

The ECB has already lowered the bar on collateral during the
financial crisis. Pre-crisis it only took debt rated in A
territory, but it has loosened rules to allow banks to borrow
ECB money on the back of assets rated as low as BBB-.

Last week S&P cut Greek debt to junk status, or BB+,
following a further increase in estimates of its fiscal deficit.
Moody’s had threatened to do the same, prompting speculation
that a BBB- threshold might not be low enough to guarantee Greek
bonds’ eligibility as collateral. [ID:nN29263464] [ECB/FOCUS]

UniCredit fixed income analyst Kornelius Purps said he
expected the suspension to remain in place for several years.

“I don’t know if it was necessary at this time but it takes
some pressure off Greek government bonds,” he said.

“It highlights the pragmatic and flexible approach of the
ECB, so it will not be the ECB that will bring further trouble
for euro zone growth.”

The move also neutralises the power of credit ratings
agencies in deciding which debt is eligible to be swapped for
cheap central bank funds.

ECB policymakers on Friday criticised ratings agencies for
being too quick to write off Greece, and Austria’s Ewald Nowotny
is among those who have complained such agencies have too much
power. [ID:nLDE63T1SL]

For a Q&A on the ECB’s collateral rules, see [ID:nLDE6420WJ]
Stock Market Trading

(Reporting by Marc Jones; editing by John Stonestreet and Neil
Stemleman/Tony Austin)

UPDATE 3-ECB will accept even junk-rated Greek bonds