STOCK MARKET WATCH -- Thursday, 1 March 2012

[Demeter]

18. Support Is Offered to Greek Banks After Latest Downgrade

http://www.nytimes.com/2012/02/29/business/global/support-is-offered-to-greek-banks-after-latest-downgrade.html?_r=1

The European Central Bank acted on Tuesday to prevent a potential collapse of the Greek banking system after the country was declared by a large ratings agency to be in “selective default,” making Greek bonds ineligible as collateral for loans from the central bank. Standard & Poor’s issued the most recent downgrade late Monday because of the debt-reduction deal reached last week with Greece’s private sector creditors. Greece will pay back less than half the face value of its bonds under the agreement, which is ostensibly voluntary.

The central bank did not specifically mention the S.& P. downgrade on Tuesday, but it said in a news release that the agreement with creditors meant that Greek bonds could no longer be used as collateral to obtain cash from the central bank...But the European Central Bank said banks could continue to draw cash from national central banks temporarily under a separate program known as emergency liquidity assistance. The central bank said it would accept Greek bonds as collateral again in mid-March, when European governments will guarantee part of the value of Greek bonds under a new program.

In Athens, the Greek Finance Ministry said in a news release that “the downgrade has no impact in the Greek banking sector” because the Bank of Greece and the European bailout fund would step into the breach. Since the beginning of the financial crisis in 2008, the European Central Bank has been allowing banks in the euro zone to borrow as much money as they wanted at the benchmark interest rate, which stands at 1 percent. But banks must post collateral. Banks typically have large holdings of their own country’s debt, which they use as collateral. That makes them highly vulnerable if the debt is declared to be in default.

Greek banks would probably collapse if they could not use their holdings of domestic bonds as collateral to obtain cash, and banks in some other countries might also run into problems. If enough investors take part in the planned bond exchange, ratings agencies are expected to remove the “selective default” rating from Greece. They would then become eligible as collateral again, albeit at a steep discount....