My Big Fat Greek Collateral Conversion | FT Alphaville

My Big Fat Greek Collateral Conversion

Happy National Day, Greece!

Here’s your present from the European Central Bank — some collateral flexibility.

Remember that in the beginning, the Bank’s collateral requirements for its repo operations were firmly set in stone at securities rated A- and above. Come the credit crisis, this was lowered to BBB- — although the ECB Governing Board decided to allow this framework only to the end of 2010, in order to keep the bank’s exit strategy on track.

Indeed, throughout the Greek debt crisis — which saw the country’s sovereign rating lowered to below the ECB’s minimum threshold by every major ratings agency except Moody’s — the ECB stuck to its guns.

To wit:

9/2/10 ECB President Trichet, in a Q&A session following the January ECB meeting, stated that the ECB will not change its collateral framework for any country: “no government, no state can expect special treatment”.


23/2/10 ECB member Gonzalez-Paramo commented on the ECB’s collateral rules in an interview saying “It’s certainly unthinkable to change the rules to solve the specific problems of any individual country or bank”.

But on Thursday, ECB president Jean-Claude Trichet switched tack:

Let me also take advantage of my presence in front of the European Parliament to lay out what I already mentioned in the hearing before the Economic and Monetary Committee on Monday. 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. In parallel, we would introduce, as of January 2011, a graded haircut schedule, which will continue to adequately protect the Eurosystem. I will provide the technical details when reporting on the Governing Council decisions of our next meeting on 8 April.

Because, as Evolution Securities’ Gary Jenkins notes, it would make very little sense organising a bailout with one hand and creating a (collateral) crisis with the other.

Related links:
The European exit strategy, revisited – FT Alphaville
How do you say vicious circle in Greek? – FT Alphaville
ECB must re-examine its dependence on ratings agencies – Erik Nielsen