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ECB urged to revise collateral rules after 'bizarre' veto on Greek loans

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Left-wing trade unions protest in Athens, Greece last week, against spending cuts aimed at restoring international confidence in the country's economy

Left-wing trade unions protest in Athens, Greece last week, against spending cuts aimed at restoring international confidence in the country's economy

Left-wing trade unions protest in Athens, Greece last week, against spending cuts aimed at restoring international confidence in the country's economy

THE European Central Bank should revise "a bizarre situation" after its collateral rules left ratings agency Moody's Investors Service holding a veto over Greece's access to ECB loans, analysts at Goldman Sachs Group said.

The eligibility of Greek government bonds is in doubt after agency Standard & Poor's on December 16 joined Fitch Ratings in downgrading its debt to BBB+. The move left Moody's the only major agency with an A1 rating on Greece's debt, three levels higher than the Fitch and S&P grades.

A Moody's cut to Baa1, a move of three notches from the current grade, would mean Greek bonds will not be accepted by the ECB if it reverts as planned to its pre-crisis collateral rules in a year's time.

"This is a bizarre and ultimately untenable situation for the ECB," said Erik Nielsen, Goldman's chief European economist in London.

Outlook

"Unless we get a major improvement in the Greek fiscal outlook during the next few months, the ECB would want to rectify the situation.

"The unthinkable -- that the ECB would not accept sovereign securities from a member as collateral -- has become a measurable risk, and one exclusively controlled by Moody's," Mr Nielsen said.

He said the ECB should change its rules so that ratings of two out of three rating companies complied with its collateral requirement.

This would remove "the inappropriate veto right" of any of the three agencies.

Separately, ECB policymakers are starting a consultation process with banks, investors and market participants on how residential mortgage-backed securities can be made more transparent.

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The ECB is trying to better monitor the quality of the assets it is holding in return for the funds it pumped into the banking system during the crisis. European banks have created €1.1 trillion of asset-backed securities since June 2007, which they can use as collateral for ECB loans. (Bloomberg)


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