ECB eyes extra funding to Greek banks as market plunge rocks Athens

[October 16, 2014]  By George Georgiopoulos and John O'Donnell

ATHENS/FRANKFURT (Reuters) - The European Central Bank will loosen its rules on collateral quality to give Greek banks access to more funding, a Greek central bank official said, to help keep them steady following a plunge in Greek stocks and bonds.

Another person familiar with the matter said the ECB was set to discuss loosening collateral rules for Greek banks at a meeting of policymakers on Thursday.

"The move was decided late on Wednesday evening after talks between the government, the ECB and Greece's central bank governor," the Greek official told Reuters, declining to be named. "It is a supportive move given the pressures in the last two days."

Bank of Greece Governor Yannis Stournaras was in Frankfurt on Wednesday.

Under the offer, the ECB would apply a smaller discount than at present when calculating the value of bonds that banks offer in return for ECB funding. This in effect allows lenders to tap further funds, despite the risks.

The discount in value reflects the credit quality of the assets offered as collateral, in this case usually junk-rated Greek government bonds or debt guaranteed by Athens.

"The situation in Greece has improved, reforms have been done and the program has made progress," the person familiar with the matter said. "You can reward Greece."

The move follows two days of heavy selling of Greek stocks and bonds by investors worried about the government's plan for Greece to exit its international bailout more than a year ahead of schedule and the threat of early elections next year.

In the last two days, shares have lost more than 12 percent of their value and the yield on Greece's benchmark 10-year bond <GR10YT=TWEB> has surged above the 7 percent level beyond which borrowing costs are widely as seen as unsustainable.

The slide continued on Thursday, with yields jumping to 8.8 percent, their highest level since January, and stocks falling.

The Greek official said the new smaller valuation discount meant that an extra 12 billion euros of liquidity could in theory be tapped by Greek banks.

The move comes amid concern in Frankfurt that Greece could struggle were it to quit its financial aid program early.

The ECB’s offer to disregard Greece’s low credit rating and accept more government and bank bonds as security for its funding only applies as long as Athens stays under watch in an EU/IMF aid program. If it leaves, the special treatment and the extra finance for its banks, would disappear.

Cyprus is the only other country in a program.

The decision to trim the "haircut" on Greek collateral is also related to plans by the ECB to stop accepting bonds issued by Greek banks and guaranteed by the government as eligible collateral from March next year, a senior Greek banker said.

The European Commission said on Thursday it will work with Greece to ensure there is a smooth evolution of support for the country after its bailout program ends.

"Europe will continue to assist Greece in whatever way is necessary," spokesman Simon O'Connor told a news briefing.

POLITICAL FEARS

Greek banks have cut their borrowing from the ECB -- by 2 billion euros in the last month to 42.56 billion euros -- but still depend on its funding for liquidity.

"If the haircut applies on all asset classes used as collateral to draw funds from the ECB, it is a positive move," said Maria Kanellopoulou, analyst at Athens-based Euroxx Securities.

"If it only affects government bonds and T-bills, the impact will not be significant, since after Greece's debt restructuring banks hold small amounts of such assets."

Greek banking stocks erased early gains and were trading 1.5 percent lower on Thursday.

Investors are worried about Greece's ability to fund itself if the government follows through on plans to quit an international bailout -- the country's second since 2010 -- at the end of the year, a year ahead of schedule.

Investors also fear a snap election next year that could bring the anti-bailout Syriza party to power. The leftist party has been leading the conservatives in the ruling coalition in opinion polls.

(Editing by Catherine Evans)

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