admincollision course with credit rating agencies.
The ECB has flagged a rise in its benchmark lending rate, probably to 1,50 percent, owing to dogged eurozone inflation currently running at 2,7 percent.
In London, the Bank of England will keep its key interest rate at a record low 0,50 percent and maintain the status quo into next year due to Britain’s flagging recovery, economists said. But since Moody,s slashed its rating on Portugal and Standard&Poor’s warned a plan to help Greece could lead to a “selective default,” analysts want to see how the ECB will tackle the latest turn in the eurozone debt crisis.
The central bank says it cannot accept Greek bonds as collateral in loan operations if Greece defaults but unless the bank is willing to risk a collapse of Greek banks, the ECB might be forced into a compromise.
Given that it has backtracked twice on Greece already, with the purchase of sovereign bonds and the dumping of standard collateral criteria, a third about face could do substantial damage to the bank’s reputation.
The ECB is already at odds with European politicians over how to involve private investors in plans to aid Greece.
“The ECB’s position could be challenged in the coming months,” Goldman Sachs economist Natacha Valla noted.
Ernst & Young senior economist Marie Diron felt the ECB and ratings agencies were “moving to meet somewhere in the middle.”
For all concerned, “what is really at stake is their credibility,” she said.
If rating agencies decide Greece has defaulted on its debt for only short periods, the ECB could approve emergency liquidity assistance (ELA) that has already been extended to banks in Ireland. Without ECB loans, the Greek banking sector would most probably crumble like a house of cards.
So Valla suggested the central bank “may well make ‘technical’ adjustments to the definition of ‘eligibility’ at some stage, so as to remain able to accept Greek paper without this being seen as a capitulation.”
Diron said: “Deep down I think everyone would agree that Greece is defaulting, or restructuring its debt, however, you call it. “This restructuring or default needs to be managed in as orderly a way as possible” to avoid contagion to other debt-stricken eurozone countries like Ireland and Portugal. – AFP.
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