Greece Downgrades May Hinder Banks Seeking 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.
Budget Shortfall
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.
“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 246 basis points today from 130 basis points onOct. 5. That compares to 25 basis points for Finnish 10-yearbonds. Credit-default swaps on five-year government bonds roseto 191 basis points on Dec. 7 from 124 on Oct. 5. That’s thehighest in the euro region, followed by Ireland at 153 basispoints.
‘Element of Panic’
“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 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.
Deficit Plan
“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’s socialist government, elected in October, plans tocut the budget deficit to 9.1 percent of GDP next year from 12.7percent this year. In contrast, Ireland’s Finance Minister BrianLenihan will announce plans today to cut spending by 6 percentin the face of the worst recession in Ireland’s modern history.
“Greece has had a relatively shallow downturn, but it hasone of the biggest deficits in the E.U.,” said Colin Ellis, aneconomist at Daiwa Securities SMBC Ltd. in London. “Incontrast, the U.K. and Ireland are running big deficits becausethey got absolutely clobbered by the recession and had oversizedbanking sectors. Yet they are still aware they have to addresstheir deficits.”
Greece has about 47 billion euros ($69 billion) ofcollateral at the ECB out of a total of around 700 billion eurosheld by the central bank, according to Royal Bank of ScotlandGroup Plc. If banks were no longer able to use their country’sbonds to refinance at the ECB, demand for them would wane andthe government’s borrowing costs 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 9, 2009 06:21 ESTSource: Bloomberg
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