ECB Could Still Take Greek Collateral After Default, RBS Says

Bloomberg
May 19, 2011

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.

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