A lot of attention has focused on what might happen if and when Greek sovereign debt is downgraded below the ECB’s minimum collateral collateral acceptance level.
But as BNP Paribas pointed out on Thursday, it doesn’t actually take Greek bonds being thrown out of the eligible collateral pool to inflict damage on Greek banks, and eurozone liquidity.
Much of the damage, in fact, may already have been done.
As the analysts explained:
So far, it seems that the bulk of discussion has been focus on the fiscal response. On the one hand, everyone’s wondering how much money will actually be channelled to Greece. On the other hand, the impact of substantially reducing fiscal thrust in the country will be massive. As we argued before when comparing the situation in Greece to pre- IMF Hungary, such an approach could miss an important factor, which is the banking system stability. It can be reasonably assumed that banks in the south of Europe have had difficult times accessing liquidity lately. Firstly because of cut credit lines by their counterparts. And secondly as the value of government bonds they use to repo with the ECB has dropped sharply constituting an effective haircut, regardless of the rating.
Which means the fall in the value of Greek bonds could already have affected the amount of liquidity Greek banks are able to tap from the ECB.
It’s no coincidence BNP Paribas says that the problems with Greek debt began at the end of 2009.
That was the period the ECB began to change its approach to providing liquidity to the market. As they explain it:
Granted, this change had been flagged for months by Jean-Claude Trichet but it was rather difficult to prepare for that beforehand. Consequently, it seems reasonable to assume that the ECB is working on a set of measures that would be implemented in case a systemically important part of the eurozone’s banking system found it difficult to access liquidity.
In other words, BNP Paribas expects the markets may not have seen the last of ECB ‘special liquidity operations’ just yet.
Related links:
ECB liquidity monster demands good euro collateral, soon – FT Alphaville
Trichet: ‘Default is not an issue for Greece’ - FT Alphaville
‘This might just be one of the most important communications by the ECB in its short existence’ – FT Alphaville
My Big Fat Greek Collateral Conversion – FT Alphaville