As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares To Flip Flop On Accepting Greek Bond Collateral

Tyler Durden's picture

Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg:  "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said
Dimitris Drakopoulos, an economist at Nomura. “This discussion is a
waste of time. The ECB is going to back down in the end -- what can they
do?” he added."

More:

Trichet put Greece’s fate in the hands of ratings companies when bank officials began saying in May the ECB, which has lent 98 billion euros ($142 billion) to Greek banks, would refuse to accept the nation’s bonds as collateral if any “burden sharing” by private investors produced a default rating. Growing support for a rollover by investors helped push the yield on Greece’s 2-year bond down 327 basis points in a week to 26.11 percent.

The loophole: make a "transitory" breach of your rules:

The ECB’s rulebook leaves the bank room to accept the defaulted bonds, saying only that rejecting them “may be warranted.” Trichet has already shown a willingness to skirt the collateral rules when he suspended minimum rating requirements on to give Greece and Ireland more breathing room.

Under a French-designed plan being used as a basis for talks with private investors, creditors would voluntarily agree to roll over 70 percent of bonds maturing by mid 2014 into new 30-year Greek securities backed by AAA-rated collateral. Under a second option, banks and insurers could roll over into new five- year bonds with no guarantee. ‘ S&P roiled markets yesterday, erasing the euro’s early gains, when it said the French plan would likely trigger a default rating, repeating assertions made by Fitch on June 15 about general debt rollovers.

The companies did leave Trichet with a way out, saying Greece may have to endure this pariah status only until the rollover was carried out. Fitch also said that despite the default issuer rating, its rating on Greek bonds themselves would stay above default.

Trichet’s dilemma is that he must either allow the ECB to accept the rollover and keep funding Greek banks, or risk scuttling a new aid plan that Greece needs to avoid default.

And so forth. The net result is that the ECB will ultimately have no choice but to bend its rules unless it wants a freefall run on the global bank, unless it manages to bribe the rating agencies with enough money created out of thin air, to make all the other money printed out of thin air, and soon to be collateralized with defaulted bonds, still valuable.

Is it any surprise then that this news that a key backstop of the European currency is now essentially bonds that have zero value, is sending the EURUSD higher?

We sure hope not.