Thanks Jean-Claude

Greece/ECB: Greece’s banks have at least one less thing to worry about. The European Central Bank has excluded government bonds from new rules on providing funds against relatively risky collateral.

The move should make it easier for Greek lenders to keep tapping liquidity by placing dicey Greek government debt with the ECB. But, the policy is more pragmatic than logical.

Last month, the ECB said its crisis liquidity facilities would continue to accept bonds rated below single-A as collateral. But with the broader financial crisis abating, the bank proposed to introduce new limits on what it would advance against such bonds.

The fear was that these changes, due to come in next January, would hurt Greece’s banks, which are stuffed full of Greek government debt. True, the lenders would still have been able to place Greek debt as collateral even if the country lost its A-grade credit rating. The quid pro quo for the ECB’s leniency on overall eligibility might have been even more painful haircuts on lower-rated bonds. Those fears have proved unfounded.

With government debt excluded from the new system, the haircut on any sovereign debt downgraded below single-A will be determined as it is now — an initial haircut for the specific terms of the bond, with another 5 per cent added on for safety.

By contrast, lower-rated non-government debt will have a single large haircut, again determined by the bond’s terms, but with no 5 per cent add-on. The net effect of the changes should be modest.

Haircuts under the new regime will be at least as high as the current regime, but not much more, the ECB suggests.

Jean-Claude Trichet, the ECB’s president, says the changes were not done to favour Greece. But, given the mounting erosion of confidence in Greek securities, the ECB risked making the situation worse by maintaining consistency between sovereign and non-government collateral. In a crisis, pragmatism tends to take precedence over logic.