Central bank brinkmanship in full display this Thursday:
FRANKFURT (MNI) – If Greece were to restructure its sovereign debt, its bonds would cease to be accepted as collateral by the European Central Bank, Executive Board member Juergen Stark said Wednesday, according to an ECB spokesman on Thursday.
These are the liquidity operations which have acted as a lifeline to Greece in recent months, with Greek bank borrowing from the European Central Bank still hovering around €87bn at the end of March.
Or as RBS’s Jacques Cailloux puts it, Stark’s warning is… :
“This is the last card in the hands of the ECB in warning about the implications of a restructuring.”
If you’re wondering if the ECB can legally refuse to accept Greek collateral after a restructuring, Cailloux has been through his presumably well-thumbed copy of the the ECB rulebook, “The implementation of the monetary policy in the euro area.” While there’s plenty of talk about defaulting counterparties — “on the grounds of prudence, the Eurosystem may also reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations by specific counterparties” — there’s not that much about actual defaulting debtors.
Still, you probably get the idea. It’s not an idle threat. Back to Cailloux:
From the above, it seems that the decision remains largely discretionary and there is no automatic legal constraint. The ECB’s mandate ultimately requires it to defend financial stability and would probably require the Bank to continue supporting the system by accepting some collateral. One could also envisage a situation where the Central Bank of Greece would take over the lender of last resort function.
Most intriguing.
Even more intriguing, there’s a chance ECB president Jean-Claude Trichet will speak on this soon:
In all, the ECB seems to have been increasingly sidelined from the political debate surrounding the debt crisis over the last few months. It started in March with the so-called “Comprehensive response” which fell far short of the ECB recommendation, including its wish to have the EFSF taking over the secondary market bond purchase programme. With FTD and FT reporting this morning that Pdt Trichet walked out of a eurogroup meeting on Monday night, it looks as though it is also sidelined in the restructuring debate. It will be interesting to see if Trichet makes any comment on this when he delivers his welcome address at the Colloquium for outgoing Executive Board Member Tumpel-Gugerell (2pm London time), in addition to any comments on the policy outlook …
(H/T the FT’s Chris Flood)
Related links:
Row within Europe over Greece – FT
Meanwhile on planet ECB - FT Alphaville