Why Greece Breathes a Little Easier

♠ Posted by Emmanuel in at 3/26/2010 01:09:00 PM
One of the irritants the Eurozone has been encountering with the Greek tragicomedy was self-inflicted. For, a measure that has helped Greek banks stay afloat during the credit crisis is an ECB lending window allowing the aforementioned banks to use Greek sovereign debt as collateral in availing of precious euros. Earlier on, ECB President Jean-Claude Trichet announced that this lending windows would become narrower at year-end by only accepting assets rated A-or higher instead of the existing standard of BBB- or higher. The worry was that it was quite possible that Greek sovereign debt would not meet this higher threshold come the holiday season. Ho, ho, ho.

Only yesterday, however, the esteemed Mr Trichet did a surprising U-turn and said the European Central Bank would not be doing so, thus helping Greece breathe easier along with just-announced intentions to draw up a formal contingency plan for Greece:
The European Central Bank gave Greece unexpected help on Thursday when it pulled forward an overhaul of its liquidity operations that will relieve the immediate pressure on the crisis-hit country. In a surprise U-turn, Jean-Claude Trichet, ECB president, said the bank would not go ahead with plans to raise, at the end of this year, the minimum credit rating required for assets provided as collateral by eurozone banks.

His comments in the European parliament, just hours before a Brussels summit of European Union leaders, indicated the ECB saw an urgent need to help calm financial markets’ fears about the eurozone’s stability. The move substantially reduced the risk of Greek assets being excluded if they were downgraded further, which would have had a catastrophic impact on the country’s financial system. The ECB’s minimum rating requirement is currently BBB-. Before Thursday’s announcement, that was scheduled to rise to A- at the year-end.
Some started crying "moral hazard!" at this turn of events: was the ECB going soft? Perhaps not; the ever-wily Trichet envisions a more pronounced sliding scale for collateral quality. Just as you get more money hocking higher-quality items at the pawnshop, so it is at the ECB saloon:
But Mr Trichet also announced that from next year the ECB would move to a sliding scale system that could result in it distinguishing much more between the assets of different eurozone members. That could result in a bigger “haircut” – or discount applied to the value of an asset – being applied to Greek bonds than to those of more fiscally prudent countries.
Good compromise, Jean-Claude Trichet. Why is it that American leadership is so bereft of talent of this calibre?