FRANKFURT (MNI) – The European Central Bank has raised the stakes
for a Greek debt restructuring, warning that such a move would undermine
the eligibility of the country’s sovereign debt paper for ECB liquidity
operations — a move that would throttle Greek banks’ funding.

The ECB has long and vociferously expressed its opposition to debt
restructuring. But it appears to be increasingly isolated in its
position after Eurogroup head Jean-Claude Juncker said Tuesday that
“reprofiling” may be an option. On Thursday, he spoke of “soft
restructuring.”

ECB officials immediately countered the comments from Brussels.
“Given how markets work, one should beware of using meaningless phrases,
as Greece will then have to pay a price,” Lorenzo Bini Smaghi said in
response to new talk of ‘reprofiling’.

Juergen Stark warned that “it is an illusion to think that a debt
restructuring, a haircut, or whatever kind of rescheduling or
restructuring you have in mind would help to resolve the problems this
country is facing.”

Instead, “a debt restructuring will lead to catastrophe, since it
will slash the capital of Greek banks,” Stark said, blaming “vested
interests” in Britain and the United States for fueling market pressure
on Greece.

Since the anti-restructuring mantra appears to have failed to
convince Eurozone governments, Stark also warned that after any such
move the ECB could no longer accept Greek sovereign debt as collateral
in its operations.

“A sovereign debt restructuring would undermine the eligibility of
Greek government bonds. A continuation of liquidity provision would be
impossible,” Stark said at a conference in Athens, according to a
spokesman for the ECB.

The Financial Times Deutschland cited Eurosystem sources as saying
that ECB President Jean-Claude Trichet warned finance ministers on
Monday that the central bank would no longer accept Greek government
bonds should maturities be extended.

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.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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