The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, said a senior finance official.
European Central Bank
The ECB would rely on the principle of using the best rating available from the agencies – Standard & Poor’s, Moody’s and Fitch – the official said.
The comments came after S&P on Monday became the first agency to warn that a plan, pushed by France and endorsed by Germany, for banks to roll over their holdings of Greek debt into new bonds would constitute a “selective default”.
The ECB’s continued support for Athens is crucial given that Greek banks are almost entirely dependent on the European Central Bank for funding.
Analysts had feared that the ECB’s seemingly tough Greek stance could lead to the collapse of the Greek banking system, whose borrowings from the ECB topped 100 billion euros (90 billion pounds) last month.
S&P’s move knocked the euro and put bank shares under pressure as a week-long rally in equities faded.
Analysts viewed the move as a further obstacle to the second bail-out for Greece in a year as the debt rollover proposal was conditional on it not triggering a downgrade.
Fitch, the third-largest rating agency, has also indicated it is likely to call a rollover a default. But Moody’s has yet to comment. If only one of them does not downgrade Greece, the ECB could continue to prop up the Greek banking system.
“This would give the ECB significant wiggle room,” said one large investor. The ECB on Monday night declined to comment.
The second bail-out has already been delayed as countries haggle over how to get private holders of Greek debt to contribute to the rescue.
The size of their contribution is causing concern among European officials as German banks, the largest holders of Greek debt after French lenders, said last week that they would only put in about 2 billion euros in holdings.
French and German officials said they were not unduly concerned by the S&P statement. They underlined that a rollover was unlikely to constitute a so-called credit event, which would trigger payments on credit default swaps, a form of insurance against default.
“The important thing is that we avoid a credit event, with all the resulting negative impact on credit-default swaps which occupied us after the Lehman bankruptcy,” a German official said.