Greece Downgrades May Pose Problem for Banks Getting ECB Loans
Dec. 9 (Bloomberg) -- Greek government bonds may not beeligible as collateral at the European Central Bank if the ECBreverts to pre-crisis rules in 2011, making it more difficultfor Greece to borrow money.
The credit rating on Greece’s government bonds wasyesterday cut by Fitch Ratings to BBB+ and the two other majorratings companies are threatening to follow suit. The ECBcurrently accepts bonds rated BBB- as collateral for loans afterrelaxing its rules in response to the financial crisis lastyear. At the end of 2010, it is due to revert to the old rules,under which A- is the minimum required rating.
“The banks are currently able to pledge bonds issued bytheir government as collateral at the ECB,” said Ben May, aneconomist at Capital Economics Ltd. in London. “This will nolonger be an option come the end of next year if the otherrating agencies follow Fitch’s lead.”
Standard & Poor’s on Dec. 7 put its A- rating on watch fora possible downgrade, signaling it may be reduced within twomonths. Moody’s Investors Service lowered its outlook onGreece’s A1 rating to “negative” on Oct. 29. Greek stocks andgovernment bonds tumbled yesterday on mounting concern thenation may struggle to meet its debt commitments as publicfinances deteriorate.
The government raised its 2009 budget-deficit estimate to12.7 percent of gross domestic product after Oct. 4 elections,three times higher than an earlier forecast and more than fourtimes the 3 percent allowed under the European Union’s Stabilityand Growth Pact.
‘Stronger Commitment’
“The Greek government will need to demonstrate a strongercommitment to consolidating the fiscal position,” said LaurentBilke, an economist at Nomura in London. “The Greek economy isalready paying a high price given that spreads have widenedleading to a high cost of borrowing, and this would get worse.”
The spread between the Greek and German 10-year benchmarkbonds widened to 221 basis points yesterday from 130 basispoints on Oct. 5. That compares to 23 basis points for Finnish10-year bonds. Credit-default swaps on five-year governmentbonds rose to 191 basis points on Dec. 7 from 124 on Oct. 5.That’s the highest in the euro region, followed by Ireland at153 basis points.
“There’s certainly an element of panic and hysteria,”said Peter Dixon, an economist at Commerzbank AG in London.“The ECB will bend over backwards to ensure that one of thecountries within its orbit doesn’t default. There will be a lotof arm-twisting and deals done behind the scenes should it cometo it.”
ECB Meeting
ECB Vice President Lucas Papademos met with Greek PrimeMinister George Papandreou and Finance Minister GeorgePapaconstantinou last month to discuss the risks facing theGreek economy.
Greece, the lowest-rated country in the euro region, isstruggling to shore up its finances amid a year-long recession.The European Commission expects the economy to contract 1.1percent this year and 0.3 percent next year, before growing 0.7percent in 2011.
“The government is proceeding with a plan,”Papaconstantinou told reporters in Athens yesterday. “We willdo all that’s needed to bring the deficit down in the medium-term. We will submit a supplementary budget if needed.” Greeceis committed to a “fair” fiscal consolidation, he said.
Greece has about 700 billion euros of debt outstanding, ofwhich 47 billion is currently used as collateral at the ECB,according to Royal Bank of Scotland Group Plc. If banks were nolonger able to use their country’s bonds to refinance at theECB, demand for them would wane and the government’s borrowingcosts would increase further.
“Greece is very unlikely to lose eligibility at the ECBnext year as it would need to be downgraded below investmentgrade over that period,” Jacques Cailloux at RBS in London saidin a research note. “In the more medium term, and perhaps fromJanuary 2011, the situation could become much more difficult ifthe ECB was to revert to its pre-crisis collateral policy.”
To contact the reporters on this story:Jana Randow in Frankfurt at jrandow@bloomberg.net;Frances Robinson in Frankfurt at frobinson6@bloomberg.net
Last Updated: December 8, 2009 19:00 ESTSource: Bloomberg
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