ECB's Greek Warning Deepens European Rift

Wall Street Journal
May 19, 2011

The European Central Bank warned it may pull the plug on funding for Greek banks in the event of any restructuring of Greece's government debt, an escalation in what until now has been a behind-the-scenes dispute with euro-zone governments over the best way to handle Athens's fiscal crisis.

ECB officials view restructuring—either through a reduction in the face value of bonds, known as a haircut, or an extension of maturities—as a dangerous diversion from the deficit-cutting efforts they see as critical if Athens is to regain the trust of the financial markets. The ECB, which has kept Greek banks afloat by accepting the country's bonds as collateral for short-term loans, is also worried about its own balance sheet should a default occur.

"Sovereign-debt restructuring would undermine the eligibility of Greek government bonds," ECB executive board member Jürgen Stark said in remarks at an event in Athens on Wednesday which were confirmed by the ECB Thursday. "Continuation of the liquidity provision would be impossible," Mr. Stark said.

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