Thursday, May 19, 2011

European Central Bank threatens to pull the plug on Greek lending

The European Central Bank has threatened to stop lending to banks using Greek government bonds as collateral if Athens changes the terms of the debt, a move which could bring down the country's banking system.

The eurozone's central bank has played its "last card" in an attempt to prevent the debt restructuring it fears, said analysts. The cost of insuring Greek sovereign debt rose to more than €1.33m to protect every €10m of bonds as the threat laid bare the divisions in Europe over how to resolve the crisis.

The Mediterranean nation is struggling to carry out the reforms agreed under its €110bn EU/IMF bail-out, prompting fears Athens will not be able to repay its debts, currently totalling about €340bn.

EU officials have been floating the idea of a "soft" restructuring of the debt, whereby the holders of the bonds see the terms extended.

However, Juergen Stark, ECB chief economist, said that if the country altered its repayment terms, the eurozone's central bank would not be able to lend to Greek banks putting up government bonds as collateral.

"A sovereign debt restructuring would undermine the eligibility of Greek government bonds," he said. "A continuation of liquidity provisions would be impossible." (read more)