Following the downgrading of Greek government debt to junk status, the European Central Bank (ECB) has done its part to keep Greek debt eligible as collateral for its liquidity-providing operations by dropping all rating requirements.
This is a remarkable step as the ECB bends its own rules that stipulate only investment grade debt is eligible as collateral.
From the ECB:
The Governing Council of the European Central Bank has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem’s credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government. This suspension will be maintained until further notice...
The suspension applies to all outstanding and new marketable debt instruments issued or guaranteed by the Greek government.
Greek government debt is currently rated as junk (BB+) by Standard & Poor's and BBB- by Fitch. Moody's rates it marginally higher at A3 and it is this rating which, as the highest of the three, determines the haircut.
This is the second change to Greek bond eligibility rules in less than 2 months. In a counter move to avoid becoming a waste dump for Greek crap, the ECB will announce a new set of more stringent haircut rules in July 2010 that can be expected to dampen speculative opportunities and will go into effect in 2011.
The ECB will also stop accepting other than Euro-denominated issues then.
In 2009 Eurozone banks submitted on average 2 Trillion Euros worth of assets as collateral. Asset-backed securities made up 23% uncovered bank bonds 28% and non-marketable assets 14%. Government debt made up just 11%.
Although only €76 billion or less than 4% of all collateral is rated BBB, until now the lowest accepted rating, the latest action is a clear indication that a strengthening of the ECB's bloated balance sheet is off the agenda for some time to come, keeping looming disasters in the PIIGS countries in mind.