Bloomberg News

ECB Unlikely to Accept Greek Defaulted Bonds, Commerzbank Says

July 05, 2011

July 5 (Bloomberg) -- The European Central Bank is unlikely to accept any default-rated Greek bonds as collateral, and thus the French proposal to roll over Greek securities announced last week will probably be withdrawn, according to Commerzbank AG.

The euro will slide as much as 6 U.S. cents versus the dollar if the ECB takes on the “burden” of accepting Greek securities deemed in default by credit-rating companies as collateral, Ulrich Leuchtmann, head of foreign-exchange strategy at Frankfurt-based Commerzbank, said by phone today.

Last week, Standard & Poor’s said both options in a French- led proposal to swap banks’ maturing Greek securities for new ones would likely put Greece into “selective default.” The ECB’s financial lifeline to Greece’s banks may be at risk of collapse if the central bank is no longer able to accept Greek debt as collateral for those loans.

“If it falls back to a strategy for crisis circumstances, the ECB will go against signals” it has sent to the market, Leuchtmann said. Having received a “signal” from S&P’s statement, an alternative to the French plan is likely, said Leuchtmann.

Commerzbank would lower its year-end forecast for the euro, currently at $1.45, by 5 or 6 cents if the ECB accepts the default-rated government bonds, said Leuchtmann.

In May of last year, the euro tumbled nearly 10 cents versus the dollar after the ECB altered its collateral rules to accept Greek bonds rated junk, or below investment grade. The 17-nation currency rallied this year on prospects for higher interest rates.

The Financial Times reported last night that the ECB would keep accepting Greek debt as collateral unless the four credit- rating companies it uses, including S&P, Moody’s Investors Service, DBRS Inc. and Fitch Ratings, declare a default. The FT cited a senior finance official it didn’t identify. The ECB declined to comment on the report.

A finding of default by even one of the credit-rating agencies may be enough to prompt the ECB to reject Greek bonds, said Lutz Karpowitz, a colleague of Leuchtmann at Commerzbank.

--Editors: Keith Campbell, Daniel Tilles.

To contact the reporter on this story: Emily Blewett in London at

To contact the editor responsible for this story: Daniel Tilles at

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