ECB Makes Rating Agencies Irrelevant

The ECB has suspended the minimum credit rating requirements for Greek bonds – and only for Greek bonds – as collateral for its liquidity operations. it a decision without precedent. It effectively makes rating agencies irrelevant for the eligibility to central bank money, at least for Greece.

“Sunday’s announcements will not mark the end of the Greek debt crisis; nor will they constitute a much-needed turning point that can be sustained for many months.”

Mohamed El-Erian

It’s probably also the sharpest U-turn in history for ECN and Jean Claude Trichet who had earlier stated that no exceptions from the would be allowed. According to Bloomberg News, the move has fuelled speculation that the European Central Bank may extend the scheme to other countries, renew the programme of lending unlimited cash to banks for another year, and maybe start buying government debt.

FT Deutschland call the decision by the ECB a communication disaster in the making.

First, the ECB announced a return to the previous regime by next year, then comes the decision to reduce the minimum collateral requirement to BBB, and now the exemption for Greece only.

What will the ECB do if (or rather when ) Portugal’s debt go down? It concludes that the ECB must urgently revise the collateral requirements, and develop its own system, FT Deutschland writes.

Jean Quatremer writes in a blog post at that the ECB now faces the dilemma of having to explain why default is not option, yet lower the rating threshold to below junk status.

He says the only logical outcome of this would be a general abandonment of the ratings system.

No Ease For Greece

While Greek 10y bond yields came down by 250bp, two- year bonds still yield more than 10%.

Portuguese and Spanish yields were little changed and the euro continued to weaken against the dollar.

The market is now worried about the anti-climactic nature of the rescue package.

El Pais has analysed that the package will only cover a part of the country’s total financing need over the next three years, which are €150bn. European Commission source were quoted as saying that Greece might return to the capital markets as early as 2011, and that many countries did not fully make use of an entire IMF programme in the past.

Pimco’s Mohamed El-Erian writes in an article in The Financial Times that despite Sunday’s rescue, the Greek crisis has lots more rounds to run.

He doubts the commit by Greek society, and criticises a general lack of ownership over the reform process; he also points to several design and implementation issues that cast doubt on the viability of the aid package.

“Sunday’s announcements will not mark the end of the Greek debt crisis; nor will they constitute a much-needed turning point that can be sustained for many months. Instead, they will part of the multi-stage process that still has a few rounds left. If the design and implementation issues detailed above are valid, these future rounds would involve a reopening of negotiations and a recasting of the approach in some areas,” he writes.

Germany, meanwhile, started its fast track legislative procedure to free €22.4bn as contribution to the €110bn.

The contribution is expected to pass end of this week the FT Deutschland reports.

Angela Merkel yesterday called for a revision of the stability pact, and notably, the creation of European rating agencies.

Meanwhile,in Athens, tens of thousands of Greek state workers will extend protests on Tuesday against the country’s emergency action plan as the government pushes through legislation to enforce a three-year austerity programme.

And the meltdown of the European financial markets continues…


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Filed under International Econnomic Politics, National Economic Politics

5 responses to “ECB Makes Rating Agencies Irrelevant

  1. VoiggaLia

    Just want to say what a great blog you got here!
    I’ve been around for quite a lot of time, but finally decided to show my appreciation of your work!

    Thumbs up, and keep it going!


  2. The Destructionist

    Protests are raging in Greece today; due to the government’s reform measures to drastically cut wages, retirement benefits and pensions, while raising taxes on goods and services; all in an effort to save the country from economic collapse. Government buildings, schools and hospitals were shut down as people flooded the streets in anger. Sadly, that anger turned violent today as three people died in a bank that was set ablaze by protestors.

    Stocks lost value in most of the major global indexes yesterday on fears that Greece’s economic instability could spread to other countries throughout Europe and around the world. If the Greek economy does happen to fail, the financial repercussions felt all across the globe could be catastrophic. Could this be the beginning of a worldwide chain reaction?

    What if your wages, benefits or pensions were cut in half? How would you react to the loss in income? How would it affect your life?

    If this problem is not dealt with swiftly, I portend a very dark road ahead…for all of us.

    • econotwist

      Absolutely agree. I have been warning about this for the last two years.

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