MacroScope

They’ll be smashing plates in Athens tonight and it won’t be because it’s Greek national day.  Instead, Greek banks and investors will be revelling at the fact the European Central Bank came to the party with a big fat collateral present.

In December and January the ECB said it wouldn’t change its rules on what banks are allowed to swap for ECB loans, even if rating agencies downgraded Greek debt to the point of financial oblivion. However, with markets threatening to push the cradle of civilisation to the brink of ruin, they have decided that it wouldn’t be such a bad idea after all.

ECB President Jean-Claude Trichet said the ECB would extend looser collateral rules, accepting assets rated as low as BBB-, into next year rather than reverting to its previous A- threshold. Greece is currently rated BBB- by two of the three major credit ratings agencies.

One analyst described the move as removing the “Damocles sword” that had been hanging threateningly over Greece’s head. Another said it was the “ECB’s contribution to the resolution of the Greek crisis,” or should that be tragedy.

Despite the ECB’s generous move, Greece still faces a Herculean task to get its battered finances back in order. It is facing a refinancing marathon over the next year in order to avoid default and an eye-watering austerity plan suggests difficult times ahead for the country and its people.

In downgrading the debt to A2, Moody’s ensured that Greek (and other) banks will still be able to swap Greek bonds for cheap funding from the European Central Bank, assuming that nothing has changed by this time next year when the ECB will only accept bonds rated A-/A3 or above as collateral by at least one agency.

Both Standard & Poor’s and Fitch have cut Greek bonds to BBB-plus this month, meaning if Moody’s cuts Greece to an equivalent level, Greek banks are likely to face difficulties in getting access to liquidity as analysts estimate more than half the collateral they have submitted at the central bank is in government bonds.

Yet Moody’s explained the decision as partly due to its expectation that the ECB will keep accepting Greek debt as collateral, a decision which hinges on Moody’s itself keeping Greece’s rating above the watermark.