Breathing space

12 March 2010 By Nicholas Paisner

The European Central Bank has hinted it will continue to accept Greek government bonds as collateral. That s a relief for the country s banks, which rely heavily on the ECB for their funding. But replacing those loans while coping with a shrinking economy will be tough.

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Axel Weber, president of the Bundesbank and a member of the European Central Bank's governing council, said at a March 9 press conference that the ECB could move to a more continuous collateral framework. This would allow the central bank to accept lowerrated bonds as security for shortterm funding.

The ECB's rules state that bonds must be rated in the singleA category by at least one of the three main rating agencies to be eligible as collateral for ECB borrowing. Greek government debt is currently rated triple Bplus by Standard & Poor's and Fitch. Moody's rates the country two notches higher, at A2. However, the rating outlook is negative, suggesting that a downgrade is likely within the next 12 – 18 months.

The ECB's requirements were relaxed in 2008 to allow lowerrated bonds to be used. The original rules are scheduled to be restored at the end of 2010.

The yield on 10year Greek government bonds was 6.1 percent on March 10, according to Thomson Reuters. 10year German government bonds yielded 3.1 percent.

Context News

The ECB's requirements were relaxed in 2008 to allow lowerrated bonds to be used. The original rules are scheduled to be restored at the end of 2010.

The yield on 10year Greek government bonds was 6.1 percent on March 10, according to Thomson Reuters. 10year German government bonds yielded 3.1 percent.

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