Bloomberg News

Trichet Says EU to Back Greek Collateral in Case of Default

July 21, 2011

(Updates with comments from Trichet starting in third paragraph.)

July 21 (Bloomberg) -- Jean-Claude Trichet said the European Central Bank may be able to accept Greek collateral in the event of a default because euro-area states have agreed to provide guarantees.

Speaking in Brussels after euro-area leaders agreed on a 159 billion euro ($229 billion) plan to stem the Greek debt crisis, ECB President Trichet said heads of government had agreed to back Greek bonds up to the value of 35 billion euros in refinancing operations in the event that the country is judged in default on its loans.

“We have to lend to sound counterparties, and we will have the backing for our own refinancing operations,” Trichet said. “I can tell you that the amount of capital that has been accepted by heads of state and governments is 35 billion euros.”

Prompted by the worsening of the debt crisis that has threatened to engulf Italy, leaders empowered their 440-billion euro rescue fund to buy debt across stressed euro nations after eight hours of talks in Brussels, and risked default by persuading private sector investors to help foot the bill. The ECB softened its stance on a default, which may be declared by credit rating companies if the debt swaps and buybacks occur.

‘Everything Is a Compromise’

Trichet said he “won’t prejudge” whether Greek bonds will be classified as being in default. The guarantees backstop the ECB “in case there is anything that would hurt the collateral to have the overall eligibility for our own refinancing operations.”

Until the summit, ECB officials had stuck to the mantra that they were against any default, sparking concern that the bank would refuse to finance Greek banks in such a scenario.

“The ECB pushed the argument as far as it could,” said Laurent Bilke, an economist at Nomura International Plc in London. “It is Europe; everything is a compromise.”

Trichet may gain solace from the bailout fund’s wider remit, which he had repeatedly sought since the ECB suspended its own bond buying program in April amid concern it was doing the work of governments. Germany previously rejected broadening the European Financial Stability Facility, whose size was beefed up to its original lending target.

The facility can now buy debt directly from investors on the basis of a mutual decision by EFSF member states and an ECB declaration of “exceptional financial market circumstances.” EU President Herman van Rompuy said the purchases could be used to stabilize markets as the ECB was doing or to help countries retire debt at a discount.

--With assistance from Lorenzo Totaro, Angeline Benoit, David Tweed, Helene Fouquet, Stephanie Bodoni, Rebecca Christie, Simon Kennedy, Jonathan Stearns and Tony Czuczka in Brussels, Rainer Buergin in Berlin, Maria Petrakis in Athens, Sandrine Rastello in Washington, Matthew Brown in London and James G. Neuger in Budva, Montenegro. Editors: Patrick G. Henry,

To contact the reporter on this story: Jeffrey Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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