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European Central Bank Beefs Greek Rescue-Plan; Takes “Junk” Bonds as Collateral

Tuesday, May 4th 2010 - 05:48 UTC
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Jean Claude Trichet, ECB president Jean Claude Trichet, ECB president

The European Central Bank (ECB) has moved to shore up the €110 billion EU/IMF rescue of Greece by offsetting the impact of the “junk” rating on the country’s debt.

In defiance of a “junk” rating on Greek debt by Standard & Poor’s one week ago, the European Central Bank (ECB) boosted the rescue effort by suspending its minimum credit rating threshold on Greek sovereign debt.

The suspension means Greek debt will continue to be eligible as collateral for ECB refinancing even if SP’s rivals Moody’s and Fitch assign a similar non-investment grading on the country’s paper. “This suspension will be maintained until further notice,” the ECB said.

The brief release stated that ECB “has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Euro-system’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government.”

Furthermore, the Greek government has approved an economic and financial adjustment program, which has been negotiated with the European Commission, in liaison with the ECB, and the International Monetary Fund (IMF).

“The ECB Governing Council has assessed the program and considers it to be appropriate. This positive assessment and the strong commitment of the Greek government to fully implement the programme are the basis, also from a risk management perspective, for the suspension announced herewith. The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Greek government.”

Rescue loans are expected to be available to Greece in time to refinance an €8.5 billion debt due on May 19th, EU officials said. While Greek bond yields declined only marginally yesterday, the European authorities say the rescue means the country will not need private credit for at least 18 months. The impact on the yields on debt issued by Spain and Portugal—the two countries considered most vulnerable to contagion from the Greek crisis—was marginal.

As Eurozone governments prepare legislation to facilitate their participation in the rescue, the Greek government faces renewed street protests. With the pain in the new austerity plan frontloaded this year, containing industrial disruption will be a crucial challenge in the weeks and months ahead.

Greek Finance Minister George Papaconstantinou said the ECB decision to accept all Greek government debt as collateral when lending to banks fully shields the country’s banking system. Papaconstantinou, who spoke at a conference in Athens today, said wage-cuts and other budget measures to qualify for the 110 billion Euro aid package would affect many Greeks. “But it is the only program that can exist right now,” he said. “The decision is very simple: either this program or the country is up against a wall.”

However in spite of the ECB decision, there are still doubts and the Euro kept loosing ground against other currencies.

Categories: Economy, International.

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