EU Starts Fully Facing Up to Greek Crisis – At Last ECB Opens Relief Spigot for Athens     Print Email

The European Central Bank (ECB) has put itself at the center of the Greek rescue attempt by promising to “buy” Greek government bonds and thus help fund Athens reshape its economy at a discount.

As a sign of this new realism in EU policy, the ECB announced this week -- on the heels of the EU-IMF bailout for Greece -- that the bank will continue accepting as collateral any current or future Greek government bonds, no matter how much they are downgraded by ratings agencies.

That means, in effect, that Athens can stave off any immediate liquidity crisis, because Greek banks can now get cash from the ECB by buying government bonds and then pledging them as collateral to the EU central bank.

According to the Wall Street Journal, the new collateral rule will ward off any liquidity crises at Greek banks, which are major holders of Greek debt. They will be able to get cash from the ECB by pledging Greek bonds as collateral. It may also make eurozone banks more likely to buy Greek debt because they know they will be able to get cash for it.

At least in the short run, Greece can count on being partly financed by the ECB, which has said that its policy will remain in place until “further notice.”

It is a big step for the ECB, whose head, Jean-Claude Trichet, has until now stood by his explicit statement last January that the bank would not change its rule of only accepting bonds above a certain minimum rating. Greece’s credit ratings have now been downgraded below investment-level ratings. The Financial Times reports today that Trichet is likely to have argued that Greece's crisis should be seen as a special case that needs to be isolated swiftly.

In fact, the shift at the Frankfurt-based bank shows a new level of concern at the top of the EU about the threat now posed to the eurozone. While official rhetoric continues to reject the view that contagion from Greece will affect other countries in the eurozone, global capital markets continue to worry about a “domino effect” in which Greece’s problems trigger mounting pressures on other EU countries with debt problems of their own, starting with Portugal.

EU leaders seem only now to be acknowledging how much will be required for Greece to stave off a debt restructuring. That eventuality, which many observers think is ultimately unavoidable, would cause chaos in the eurozone if it occurs in the current mood of panic about EU economic management, economists say.

At this juncture, international markets still reflect growing doubts about the prospects for Athens to extricate itself from its debt predicament. Even if all the promised financial support (sometimes estimated to exceed $50 billion a year for three years) can be delivered, there are doubts about the ability of the Greek government to enforce its promised austerity measures in the face of civil unrest.

The core of the problem, economists say, is that Greece cannot cut back government spending and simultaneously expect enough economic expansion to “grow out of the problem” over three years.

As a result, the Greek problem has been transformed into a wider risk for other countries -- starting with Spain and Portugal -- that may need to be propped up by similar EU loans. Even Germany, the lender of last resort, cannot afford that.

A leading American economist, Simon Johnson, a former top IMF economist, has put forward what he calls “a narrow escape path” for Greece and the eurozone. He says that only more concerted EU action can avoid an early debt default by Greece that then would bring down other southern European countries and put the eurozone in dire peril.

His scenario calls for Europe to pursue a concerted policy to let the euro fall against the dollar (to improve the competitiveness of European exports), then to repeat the latest actions on Greece with other weak eurozone countries – and then, finally, to undertake a restructuring of their debts.

“Restructuring” (which amounts to a partial default) is a step that European leaders have said they would never accept. The policy reversal by the ECB may be the first evidence that the eurozone has realized how badly it has under-estimated the crisis until now.