The European Central Bank could still accept collateral from Greek banks for loans in the event the nation restructures debt, contrary to suggestions by Executive Board member Juergen Stark, Royal Bank of Scotland Plc said.
According to ECB rules, any decision on whether to accept Greek government bonds as collateral from the nation’s banks to obtain ECB funding seems to be “largely discretionary and there is no automatic legal constraint,” Jacques Cailloux, chief euro-region economist for RBS in London, said in an e-mailed note today.
Stark, speaking at an event near Athens yesterday, said any restructuring of Greek debt would be a “catastrophe” that would “undermine the collateral adequacy” of Greek bonds and make it “impossible” for the ECB to provide most funding for Greek lenders. “A restructuring would wipe out part or all the capital of the Greek banks,” he said.
ECB officials have clashed with European Union political leaders over a solution to the debt crisis. Stark and fellow board member Lorenzo Bini Smaghi yesterday ruled out a Greek restructuring after EU leaders floated the idea for the first time this week of extending the nation’s debt repayments as it struggles to meet the terms of a 110 billion-euro ($156 billion) rescue last year.
EU officials say Greece won’t be able to return to markets and sell 27 billion euros of bonds next year as scheduled under the bailout, leaving them searching for alternatives to avoid a default. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, has said a Greek “soft restructuring” is possible after the government in Athens takes additional steps to cut the deficit, such as state-asset sales.
The Frankfurt-based ECB “seems to have been increasingly sidelined from the political debate surrounding the debt crisis over the last few months,” Cailloux said. ECB President Jean-Claude Trichet walked out of a meeting of euro-region finance ministers meeting earlier this month because he was upset over talk of a voluntary restructuring, the Financial Times reported today, citing people familiar with events at the meeting.
The ECB is concerned that allowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Portugal and Ireland, which followed Greece in accepting aid. The ECB has bought 76 billion euros of bonds of fiscally stressed countries in the past year and may suffer along with private investors in a restructuring.
A Greek debt restructuring would “jeopardize all of Europe,” Bini Smaghi said in Milan yesterday. It would have a “dire” impact on Greece’s banks and economy, ECB Vice President Vitor Constancio told reporters in Brussels.
Greek banks’ reliance on ECB liquidity totaled 87.9 billion euros at the end of March. Greece’s government and central bank will extend 30 billion euros in further guarantees, contingent on banks detailing how they will wean themselves off ECB money.
“The ECB is playing its last card but unfortunately the restructuring debate has now been so politicized that it seems the decision is now somewhat remote from the central bank,” Cailloux said.