June 14 (Bloomberg) -- The Bank of Greece could follow Ireland’s example and use an emergency liquidity program to keep local lenders afloat if the European Central Bank rejected the country’s collateral in the event of default, said Alan McQuaid, chief economist at Bloxham stockbrokers in Dublin.
“Under this scenario, the Greek central bank might provide the country’s banks with funds through Emergency Liquidity Assistance, a scheme which the Irish central bank has used to support banks in Ireland,” McQuaid said in a note to clients. “Such intervention could tide Greek banks over until Greece was taken off ‘limited default’ status, allowing the ECB to resume accepting Greek bonds as collateral.”
ECB officials including Bundesbank President Jens Weidmann have said that if Greece was declared to be in default, the central bank could no longer accept Greek government bonds as collateral in its refinancing operations. European finance chiefs are in the final stages of negotiating Greece’s second bailout in a year, after the country’s credit rating was downgraded by Standard and Poor’s to the world’s lowest.
McQuaid said a so-called limited default, which would involve Greece restructuring some of its obligations while continuing to honor the rest, could “minimize the time which Greece spent in default status.”
To contact the reporter on this story: Jeff Black in Frankfurt firstname.lastname@example.org
To contact the editor responsible for this story: Craig Stirling at email@example.com