–Adds comments on changes to ECB collateral rules announced today

MADRID (MNI) – International Monetary Fund aid to Greece, which is
apparently part of an agreement being hammered out tonight by European
leaders in Brussels, must not conflict in any way with the fiscal or
monetary rules governing the EU, European Central Bank Executive Board
member Jose Manuel Gonzalez Paramo said here late Thursday.

While professing ignorance about the precise details of the accord,
which he characterized as an agreement “in principle” until it is
ratified by the EU leaders, Paramo nonetheless noted that it would
involve assistance both from the IMF and from Eurozone states.

“From what the media reports are saying, it’s a European accord,
and I want to underscore this,” Paramo said. “It’s a European solution,
which will be based on bilateral loans, with the assistance of the IMF.”

He went on to say that the involvement of the IMF “is nothing new”
in such situations. “We’ve seen that it had a notable involvement in
vetting the additional [austerity] measures in Greece,” announced
earlier this month.

However, “the fact that the IMF may intervene cannot in any way
conflict with the fiscal or monetary policy rules of the European Union
treaty, or of the Stability and Growth Pact, because those rules are
incumbent upon all of us, including Greece.”

He added: “These are the norms we are obliged to respect, which
have constitutional value and cannot be relaxed in any way by the fact
that in some measure – we don’t yet know which – the IMF may intervene.”

Paramo’s comments give voice, though in a more diplomatic way, to
the fears expressed by some of his ECB colleagues about the possibility
of IMF involvement in a financial aid package for Greece.

ECB Executive Board member Lorenzo Bini Smaghi said Wednesday that
going to the IMF could tarnish the credibility of the Eurozone and
undermine the single currency. And he asserted that the ECB has a more
“ambitious” view of price stability, implying that could be compromised
by IMF involvement.

Afterall, the IMF and ECB have been engaged recently in a
trans-Atlantic slinging match over the suggestion of IMF chief economist
Olivier Blanchard that central banks could allow a higher rate of
inflation in order to better absorb future shocks.

ECB President Jean-Claude Trichet has also expressed his concerns
about IMF involvement in the Greece crisis.

Asked about media reports that Trichet had described possible IMF
involvement as “very bad,” Paramo declined to speculate on whether the
ECB had actually said it. “But I am confident that he would agree with
what I have just said, which is that any involvement of the IMF must
remain subjected to a scrupulous adherence to the rules of the Union
treaty, and the Stability Pact, and prices.”

Paramo, while echoing the concerns of his ECB colleagues, also went
out of his way complement the IMF, saying its “technical experience” was
“excellent.” Yet those remarks seem to imply, given that no firm deal
has been announced yet by EU leaders, that Paramo is still hoping that
the IMF’s financial contribution – and thus ability to dictate policy
terms – will be limited.

Reports of a deal involving the IMF and Eurozone states began
circulating in earnest this evening after France’s presidential office,
the Elysee Palace, announced that France and Germany – the two key
Eurozone players – had reached an agreement and submitted it to EU
President Herman Van Rompuy for discussion at the summit meeting

Some announcement is expected from the EU leaders late in the

Paramo also touched on the issue of the euro’s recent decline in
foreign exchange markets, saying that “abrupt changes in exchange rates
are scarcely desirable for sustained growth.” He also said that in a
floating currency system, exchange rates should reflect economic

Paramo also touched on the decision by the ECB, announced by
Trichet earlier today, to maintain its more lenient minimum BBB- rating
on collateral into next year rather than reverting to the more stringent
pre-crisis minimum of A-.

Trichet said the ECB would implement a new system of “graduated
haircuts” as of January 1 to take account of the higher risk associated
with the lower-rated securitites.

Those two decisions go hand in hand, Paramo said. “When an
investment carries a higher risk, it’s logical that the risk control
measures take that situation into account, and that is precisely what
the [ECB] president announced today,” he said.

He noted that the ECB has frequently revised its collateral
guidelines, and not always in the direction of more leniency. He noted
for example that in recent months the bank has imposed more stringent
rules on asset and mortgage-backed securities used as collateral.

With regard to the normal haircut scale already in place, “we will
see when the time comes if there is something we need to do…as a
result of our routine review of risk control measures,” Paramo said.

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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