By Johanna Treeck
FRANKFURT (MNI) – Much as expected, today’s European Central Bank
press conference focused on the Governing Council’s new collateral
framework and on Greece, as the bank reconfirmed its assessment of
macro- economic developments and kept interest rates on hold.
President Jean-Claude Trichet denied that the modification of the
collateral framework was intended to assist Greece, but the details of
the rules — excluding government bonds from the new graded haircuts —
leave little room for any other interpretation.
Trichet also tried to assure markets that “default is not an issue
for Greece,” and he back-tracked significantly on his previous
rejection of IMF involvement in any rescue deal.
The ECB confirmed that it will keep the minimum credit threshold
for marketable and non-marketable assets in the Eurosystem collateral
framework at investment-grade level (BBB-/Baa3) beyond the end of 2010.
“In addition, the Governing Council has decided to apply, as of 1
January 2011, a schedule of graduated valuation haircuts to the assets
rated in the BBB+ to BBB- range,” the ECB said in a statement.
Importantly, however, the new rules will not apply to government
bonds. Here, current rules that apply a 5% add-on haircut on government
debt rated below A- will remain in place.
In effect, this means that Greek bonds are now not only protected
against the possibility of being excluded as collateral in ECB refis
after this year in the event of further downgrades, but will also not
suffer any additional financing burden beyond the current 5% haircut
system.
As Greece still enjoys an A2 (A) rating from Moody’s, Greek debt
would only be subject to the 5% haircut if Moody’s were to downgrade
Greek debt at least two more notches. Private debt may face much larger
haircuts, giving Greek sovereign debt a competitive edge.
Nevertheless, Trichet insisted: “we didn’t say that it was for any
particular country or any particular instruments.” His failure to
provide any coherent argument for changing rules on private debt, in
particular at the current juncture, made this statement all the less
convincing.
The ECB also said that as previously planned, it will eliminate at
the end of 2010 the collateral eligibility of foreign
currency-denominated debt instruments, subordinated marketable debt and
debt instruments issued by credit institutions that are traded on
accepted non-regulated markets.
Overall, Trichet’s assessment was that the collateral framework
effective as of next year will be somewhat more restrictive than current
rules, but “will not imply an undue decrease in the collateral available
to counterparties.”
Quizzed on Greece, Trichet tried to assure markets that no default
is looming and endorsed the rescue plan for the debt-stricken country.
“The Governing Council welcomes the statement on Greece made by the
heads of state and government of the euro area countries on March 25,”
he said. “Nobody should take lightly the statement, which is signed,
again, by all heads of the euro area. And so I take it for a very, very
serious commitment.”
Trichet went out of his way to back down from his previous
rejection of IMF involvement in a rescue for Greece, claiming that he
had been misquoted as saying that such an involvement would be “very
bad.”
“We would not have been satisfied at all had we had the IMF alone,
no conditionality of the governments, evaporation of the Eurogroup,
evaporation of the conditionality that is enshrined in the Treaty of
Maastricht and enshrined in the Stability and Growth Pact,” he
explained.
However, with the ECB largely sidelined in what is essentially a
political affair, the president was not able to offer new insights. “As
far as I understand it, it is in the hands of the Greek government
itself. Then we will have to see…how to organize, if it is asked, the
packages in question.”
He also gave no recommendation for borrowing costs should Eurozone
governments indeed extend loans to Greece, other than to argue that the
lending countries must not incur additional costs by lending at rates
that are lower than their own cost of funds.
The Financial Times reported earlier this week that Germany thinks
loans should only be extended at market rates, while other EMU member
state governments are willing to accept lower rates.
“There is a minimum, which is that the interest rates which would
be shipped to Greece would be at least the cost of the refinancing by
the various governments concerned. The principle of no subsidy is
absolutely clear,” Trichet said at one point.
However, Trichet made clear that this is “up to each government”
and the ECB to decide.
On the decisions that fall directly into the ECB’s sphere of
responsibility, the central bank’s macro-economic assessment and thus
its monetary policy stance were unchanged.
In particular, the latest introductory statement maintained an
overall dovish tone and scarcely differed from last month’s.
Trichet confirmed that the Eurozone’s recovery remains intact,
ascribing the fourth quarter’s flat GDP reading and weak activity in
early 2010 to adverse weather conditions. The ECB still expects the
moderate recovery to continue through 2010, but again noted that growth
is likely to remain uneven.
Trichet largely downplayed the spike in Eurozone consumer price
inflation to 1.5% in March, once again ascribing the increase to energy
effects and, possibly, food prices rises due to exceptionally cold
weather. The ECB thus expects price developments “to remain moderate
over the policy-relevant horizon,” he said.
Accordingly, interest rates remain “appropriate,” Trichet said. The
exit from non-conventional liquidity measures did not feature either in
the introductory statement or the question and answer session,
suggesting that here too, the ECB sees no need to change course.
–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com
[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$,MGX$$$]
