The European Central Bank said Greek debt will temporarily be ineligible as collateral for loans after Standard & Poor’s yesterday cut Greece’s credit rating to “selective default.”
The ECB “has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations,” the Frankfurt-based ECB said in a statement today. “This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer.”
While the ECB’s risk management rules prevent it from accepting collateral deemed to be in default, the central bank will resume taking Greek debt once a 35 billion-euro ($47 billion) guarantee scheme agreed by European governments comes into force in mid-March. A reduction in Greece’s credit rating was anticipated after the country agreed a debt write-down with private sector investors, seeking to reduce national debt to 120 percent of gross domestic product by 2020 from 160 percent last year.
“After the downgrade, it was clear this was going to happen,” said Christian Schulz, an economist at Berenberg Bank in London. “The ECB isn’t going to make an exception to its rule on not accepting defaulted collateral, and this is anyway a temporary arrangement.”
The ECB said banks affected by the suspension of Greek debt as collateral can turn to so-called Emergency Liquidity Assistance schemes provided by their national central banks.
Greece published the formal offer document last week for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The Greek government agreed that bonds held by the ECB and euro-area central banks would be exempt from any debt restructuring.