ECB On Greek Bonds

ECB signals Greek bond concession
By Kerin Hope in Athens and David Oakley in London
Published: March 22 2010 18:53 | Last updated: March 22 2010 19:52

http://www.ft.com/cms/s/0/c1620610-35dc-11df-aa43-00144feabdc0.html

Greece was on Monday night offered a significant concession by the European Central Bank, which indicated for the first time that it might continue providing liquidity against Greek bonds, even if the country was downgraded further by ratings agencies.

Jean-Claude Trichet, bank president, said his “working assumption” was that Greece would not face problems. But in a noticeable softening of the ECB’s stance, he added that if that assumption was “too optimistic . . . then we would look at the situation”.

His comments, in an appearance before the European Parliament, referred to ECB plans to return at the end of this year to a minimum A-minus rating for assets it accepts as collateral in its liquidity operations.

Exclusion from the system, which has acted as a life-support for the eurozone banking system, could prove catastrophic for Greece. Currently only Moody’s would give it the required rating. Previously the ECB has stuck strictly to the line that there would be no exceptions.

Mr Trichet also strongly rejected the idea proposed by Angela Merkel, Germany’s chancellor, that reform-unwilling countries could be expelled from the eurozone. “The euro area is not à la carte. We enter the euro area to share a common destiny,” he said. Exiting the eurozone was legally “impossible”, Mr Trichet added.

The comments, highlighting his belief in driving ahead Europe’s economic integration, came as the Greek central bank called for swift implementation of the government’s latest fiscal package, to restore confidence and reduce the high cost of borrowing.

“A prolonged effort will be needed to break a vicious circle [of rising budget deficits and public debt] that has been pushing the economy into decline,” the Bank of Greece said in its annual report on monetary policy. It said the economy would shrink by “around 2 per cent” this year on top of a 2 per cent contraction in 2009.

“Policy measures must be implemented fully and without delay ... to restore confidence and have a favourable impact on the cost of borrowing,” it said.

The Greek bond markets also came under pressure on Monday amid growing worries that Germany will balk at plans to offer explicit financial support.

Mr Trichet said Greece could be helped if necessary via a set of emergency loans from other eurozone countries, on the condition that there were no subsidies involved and on the basis that there was a threat to the whole eurozone. But he said European Union fiscal rules should be strengthened to boost the “peer pressure” on underperforming eurozone members.

The extra premium Greece has to pay over Germany to borrow rose to the highest level since the end of February. Concerns are also spread into Greece’s equity markets, with the Athens stock exchange falling 2 per cent on Monday.