ECB's Default Position on Breaking a Tie

Wall Street Journal
July 6, 2011

If the major rating agencies all declare that bank-rollover plans for Greece put its bonds in default, the European Central Bank would almost certainly refuse Greek debt as collateral for its lending operations. That much has been made clear by top officials in recent weeks.

But the warning from Standard & Poor's that it would likely classify the French rollover plan for Greece as a default raises a scenario straight out of a John Grisham novel: What if there's a hung jury?

If the ECB strictly applies its longstanding collateral rules, then a default determination might have to be made by all the major rating agencies. The central bank has long used the best rating among the major rating agencies to determine whether a debt instrument meets its minimum rules. (This is referred to as the "first best" principle.")

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