When no means yes

Financial Times
Editorial
July 5, 2011

Markets, like poker players, try to detect behaviour patterns in the other players around the table. In the case of the European Central Bank, the louder it insists that it will not lower its credit thresholds, the more imminently do markets expect its standards to be relaxed.

For weeks, the ECB has fiercely resisted the Berlin-hatched push to make private investors participate in a new financing plan for Athens. The reason is that even a notionally voluntary rollover of Greek debt by private banks would probably lead credit rating agencies to downgrade Greece to “selective default”. The ECB had warned that such a rating would prevent it from issuing liquidity secured by Greek sovereign bonds – the only source of funding to which the Greek banking system currently has access.

Not for the first time, the rules turn out to be flexible. It is now suggested that the ECB can accept Greece’s paper even if two of the three main CRAs rate it in default. This echoes the decision in October 2008 to lower rating thresholds and later suspensions of thresholds above default status altogether for Greece and Ireland.

In all these cases, the ECB did the right thing: the need for liquidity was paramount in 2008, and it is ridiculous to stake the survival of the Greek banking system mechanically on the decisions of a few private entities – which themselves say they would rather be rid of their quasi-regulator status.

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