The proposed Greece financial bail-out agreement faces a new major hurdle after the European Central Bank (ECB) said it would not accept defaulted bonds as collateral, a move that will cut-off funding for the Greek banking system.
ECB chief Jean-Claude Trichet told Financial Times Deutschland that other EU members need to device ways to keep Greek banking system going if they continued with their push for a bail-out plan that would result in bond defaults.
“If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral. The governments would then have to step in themselves to put things right … the governments would have to take care the euro system is presented with collateral that it could accept” he told in an interview to the newspaper published today.
Mr. Trichet’s observation put him in direct conflict with German Chancellor Angela Markel ahead of Thursday’s crucial meeting in Brussels, who insisted bondholders bear some of the burden of the new €115 billion Greek bail-out package.
All of the plans being discussed will lead to partial default, ratings agencies maintained.
“The more voluntary contribution the private creditors make, the less likely will it be that further steps are needed”, said Ms Markel in an interview to a German television, insisting any future deal to avoid Greek debt rescheduling would require substantial voluntary involvement of private creditors to ease existing debt burden. She has already warned that she’ll only attend the meet in Brussels on Thursday if there is a consensus on Greece’s rescue plan.
Ms Markel said she considers the issue as “urgently necessary”, but added that “I will only go if there is a result”.
Senior officials of EU are engaged in two urgent negotiations now, one among themselves and the other with private creditors holding Greek debt. However, they remain edgy about the contagion effect of the deal on European banks.