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The European Central Bank joined the international rescue of Greece, saying it would indefinitely accept the country’s debt as collateral regardless of its country’s credit rating, underpinning gains in the bond market. […] it is clearly buying insurance against the likelihood of further multiple downgrades of the Greek debt […] Jean- Claude Trichet, who began the year saying the ECB would not change its “collateral policy for the sake of any particular country.” […] today’s announcement “leaves a sour taste with regards to the ECB’s long-term credibility.” […] 

Greek banks hold about 45 billion euros of government bonds, about 10 percent of their total assets, according to an April 30 report by Capital Economics Ltd. Greek bank shares have slumped this year as the country’s bonds tumbled on concern about a possible default. The Greek bank-share index has fallen more than 26 percent, almost twice the decline in the country’s benchmark ASE Index. “For the banking sector it’s a big relief,” said Frederik Ducrozet, an economist at Credit Agricole SA in Paris. “It’ll support the liquidity situation and Greek banks will still be able to come to the ECB with their country’s sovereign debt, European banks will be able to too.” […] The ECB decision “removes the risk of a liquidity crisis in the euro zone due to rating downgrades, said Luca Mezzomo, head of macroeconomic fixed-income research at Intesa Sanpaolo SpA in Milan. “Greek banks refinance about 12 percent of their assets at the ECB, a situation that in the future will have to be corrected, but certainly not during the implementation of an emergency plan of support.” […]

If Greece’s woes do spill over into other economies and markets, the ECB may need to take other steps to stem the contagion and protect its economy from a return to recession or even splintering, said David Owen, chief European economist at Jeffries Group Inc. in London. Among its options would be widening today’s new collateral arrangement to other members, reviving unlimited loans to banks for up to a year and even buying bonds, he said. While the ECB is prohibited from buying assets directly from authorities, it can do so on the secondary market. “There may be a need for more radical measures from the ECB,” said Owen. “Today isn’t the end of the story.”

Source: Bloomberg, hat tip to Objectif Liberté

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