The Greek saga took another interesting turn today, though it will likely sow the seeds of further uncertainty around what to do next with Greece.
As European governments seemed to move closer to some sort of “soft restructuring” of Greek debt following the eurozone finance minister meeting early in the week, we have seen a strong push back by the ECB which is adamantly against the idea.
Today, we see the ECB double down on their pronouncements by letting it be known that any type of reprofiling of Greek debt would put in jeopardy the central bank’s ability to use Greek sovereign debt as collateral.
From “Currently, the ECB takes Greek debt as collateral at nominal value, regardless of the rating, with a pre-defined haircut. However, the central bank has the option to “reject assets, limit the use of assets or apply supplementary haircuts to assets submitted as collateral in Eurosystem credit operations” on the grounds of prudence.
Any decision to remove Greek debt from the list of eligible collateral would no doubt lead to a meltdown of the Greek banking system, which has been kept afloat by the ECB’s generous liquidity provision against even low-graded paper.
It would also make life harder for other Eurozone banks which hold Greek debt and use it almost exclusively for refinancing at the central bank, benefiting from crisis-spurred change in collateral rules.
In short, the central bank’s threat of rejecting Greek government paper should debt obligations not be honored in full means that no kind of restructuring in the Eurozone could ever be “soft”. The ECB has toughened its stance, making it more difficult for governments to head down this road.”
Nick Nasad

Chief Market Analyst

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