S&P Leaves ECB in a Tight Spot

by Mark Brown

Wall Street Journal
July 4, 2011

Standard & Poor’s has put the Greek debt crisis ball firmly in the European Central Bank’s court.

The ratings company’s statement Monday saying that the Federation Bancaire Francaise’s proposals that would see French lenders reinvest maturing Greek debt in new bonds would likely result in a ‘selective default’ rating for Greece would appear to scupper the plan.

S&P has left the ECB very little wriggle room. It believes the aim of a Greek debt rollover is to cut the risk of a default or more painful restructuring that would involve bondholders missing out on principal repayments.

The ECB has said that it will not accept bonds with a default rating as collateral. Under its statutes, it can only accept “adequate collateral.”

But Greek banks which hold Greek bonds and use them as collateral are dependent on the ECB for funding. In May, they borrowed €97.5 billion from the ECB. So the fear is that if the ECB stops taking Greek bonds as collateral because the country is in selective default, Greek banks start going bust and the country’s economy collapses.

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