Greek tragedy deepens after credit cut, ruling

FRANKFURT/ATHENS

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The European Central Bank (ECB) said yesterday it will temporarily refuse to accept Greek bonds as collateral, but any banks hit by this could borrow cash from national central banks instead, Agence France-Presse reported.

The ECB said in a statement that Greek bonds could no longer be used by banks in the eurozone as collateral for ECB loans following the announcement by rating agency Standard & Poor’s that Greece is in “selective default.”

A sovereign nation enters “selective default” when it elects to delay repayment of some of its financial obligations while fully honoring others.

“The word selective default scares without reason,” said Greek Finance Minister Evangelos Venizelos yesterday. “It is not a real event, it is not default. It is an evaluation by the three familiar rating agencies.”

The ECB’s governing council “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by Greece for use as collateral in eurosystem monetary policy operations,” the statement said.

“This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.”

On Monday, S&P declared Greece in “selective default” after banks agreed to write off more than half of their Greek debt holdings in a second EU bailout of the country.

The rating was lowered from S&P’s already junk-level “CC” grade for Greece, which has been seeking to avoid an outright default on its massive debt by negotiating a “voluntary” debt exchange with creditors.

Greek banks are particularly big holders of Greek government debt, and are also heavily reliant on refinancing operations by the ECB to stay in business.

The ECB move will make it harder for Greek banks in particular to take advantage of a huge cash bonanza by the central bank today aimed at averting a credit squeeze in the single currency area.
In the second such operation in two months, the ECB is offering as much money as banks want at a rock-bottom interest rate of 1.0 percent for a period of three years.