ECB warns it could reject Greek bonds as collateral

(FRANKFURT) - The ECB could stop accepting Greek bonds as collateral against central bank funds if Athens changes terms under which it repays its debts, the bank's chief economist has said.

A European Central Bank spokesman confirmed on Thursday a remark by ECB chief economist Juergen Stark, who had said on Wednesday in Athens: "A sovereign debt restructuring would undermine the eligibility of Greek government bonds.

"A continuation of liquidity provisions would be impossible."

If the ECB followed through on the warning, it would abandon an exceptional decision that allows Greek banks to borrow ECB funds by putting up Greek sovereign bonds as collateral.

Those bonds have been downgraded to junk status and would not normally qualify.

"The ECB is now in the very uncomfortable position to be potentially forced to refuse Greek collateral paper in the event of a restructuring," RBS economist Jacques Cailloux commented.

"If that was the case then the Greek banking system would fail. The latest data show Greek bank funding via the ECB at 87.9 billion euros ($125.3 billion) as at the end of March," he added.

The ECB has clearly and repeatedly voiced opposition to any kind of change in how Greece is to reimburse its debt, out of concern that it could cause the Greek banking sector to collapse and a ripple effect could slam the 17-nation eurozone.

Various ways of restructuring Greece's public debt have been floated recently as markets become convinced that Athens will not be able to reimburse the money it has borrowed on time.

Earlier this week, the head of the Eurogroup of finance ministers, Jean-Claude Juncker, had mooted one such possibility, but stressed Greece would first have to demonstrate serious efforts in getting its finances in order.

Greece currently has around 340 billion euros ($480 billion) in debt, an amount that could rise to roughly one-and-a-half years of total national output by the end of 2011.

Berenberg Bank chief economist Holger Schmieding said the ECB and the German government were "heading for their most serious dispute yet" on the question of how to resolve the Greek debt dispute.

"Nervous markets need clarity," Schmieding warned, before adding that they might demonstrate an allergic reaction "to noise."

"Settling the dispute soon may be as important as the precise nature of a common approach on which the two sides may agree," he said.