ECB throws Athens a lifeline

European Central Bank President Jean-Claude Trichet said the bank will leave emergency collateral rules in place into 2011, giving Athens a major reprieve on funding rules. “It is the intention of the ECB’s Governing Council to keep the minimum credit threshold in the collateral framework at investment grade level [BBB-] beyond the end of 2010,” Trichet told the European Parliament in Brussels yesterday. He also said the ECB will in January introduce a “graded haircut schedule,” allowing it to charge banks more for the lower-rated collateral they submit in return for ECB loans. “This is the ECB’s contribution to resolving the Greek crisis,” Laurent Bilke, a former ECB economist now at Nomura International, told Bloomberg. “This is a way of saying we need to give a little bit of support to Greece and perhaps also send a message to the rest of the EU that it’s not a bad idea to support Greece.” Greek bonds had risked becoming ineligible for ECB refinancing operations at the end of the year in the event of ratings agency Moody’s downgrading it to a level on par with the other ratings agencies. Trichet’s comments indicate a reversal of the stance he took in January when he said the ECB would not change its collateral policy “for the sake of any particular country.” The ECB had been scheduled to reintroduce pre-crisis rules at the end of 2010. Spreads between Greek bond yields and German benchmarks narrowed slightly after Trichet’s announcement. The Greek two-year note yield fell 33 basis points to 4.83 percent and the 10-year yield fell nine basis point to 6.31 percent. The spread, or extra premium, investors demand to hold 10-year Greek debt over similar-maturity Bunds shrank to 319 basis points from 332. Athens is still saddled with borrowing costs more than double those of Germany and will have to borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt. Trichet has said that the ECB considers recently announced austerity measures by Prime Minister George Papandreou as “courageous and convincing.” Trichet spoke hours before EU leaders convene in Brussels, with Germany pressing to end weeks of continental wrangling over an aid package for Greece. Had the ECB reverted to its pre-crisis rules, a downgrade of two notches by Moody’s, which has an A2 rating on Greece, would have meant banks couldn’t use Greek government bonds when borrowing from the central bank. That risked exacerbating the fiscal crisis and threatening the region’s recovery from recession. Country’s debt crisis just the ‘tip of the iceberg’ One of China’s top central bankers warned yesterday that Greece’s debt crisis was just the “tip of the iceberg,” and raised the specter of a fiscal implosion spreading across Europe. “Greece is only one case, but it’s only a tip of the iceberg,” People’s Bank of China Deputy Governor Zhu Min told an investment forum in Hong Kong. “I don’t think Greece will go bankrupt because it’s still relatively small, but we don’t see decisive action that tells the market, “We can solve it, we can close it,’ so the market is very volatile.” Possible solutions to the Greek debt crisis could involve the International Monetary Fund handing Greece an aid program worth about 20 billion euros over 18 months, Goldman Sachs said yesterday. The cash-strapped nation may ask the Washington-based lender for support within weeks and “very likely” in a few months as it struggles to cut the biggest budget deficit in the European Union, Erik Nielsen, chief European economist at Goldman Sachs, said. “This would be the last opportunity for the leaders to discuss the matter before Greece might be running out of cash,” London-based Nielsen said.

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