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 report.
LIQUIDITY SECURE
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.
