ECB Caves in on "Temporary" Defaults and Collateral; Which Country is Next to "Temporarily" Default?

by Mike Shedlock

As Greek 2-year debt yields hit 39.15% the bond market finally forced the ECB's hand, and Trichet comes out looking foolish, not only on his "we say no to default" stance, even temporary defaults, but also on his ridiculous bluff repeated for the nth time just 2 days ago regarding the acceptance of Greek bonds as collateral.

Bloomberg reports Austria Central Bank Head Signals ECB May Bend on Greece

European Central Bank council member Ewald Nowotny suggested the bank may compromise and allow a temporary Greek default as officials scramble to fix a sovereign debt crisis that’s spreading to Italy and Spain before a leaders’ summit in two days.

As Spanish financing costs surged at a 4.45 billion euro ($6.31 billion) treasury bill auction today, policy makers are trying to ease a split that’s pushed interest rates on Spanish and Italian 10-year debt above 6 percent for the first time since the euro debuted 12 years ago. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.

Nowotny, who heads Austria’s central bank, issued a statement today concerning the “interpretation” of his earlier comments in an interview with CNBC. He is in “complete agreement” with ECB President Jean-Claude Trichet that the aim is to “avoid any situation that would make it impossible for the ECB to continue to accept Greek sovereign bonds as collateral,” the statement said.

In the CNBC interview broadcast this morning, Nowotny said there’s “a full range of options and definitions, from a clear- cut default, selective default, credit event and so on.”

“This has to be studied in a very serious way,” he said. “There are some proposals that deal with a very short-lived selective default situation that will not have major negative consequences.”

The comments helped boost financial markets amid speculation a solution to the crisis will be found. The euro rose to $1.4197 at 12:20 p.m. in Frankfurt, up from $1.4028 yesterday. Yields on Spanish and Italian 10-year bonds retreated from euro-era highs as stock markets rallied.

Spanish yields fell 17 basis points to 6.10 percent as of 12:35 P.m. in London, while Italy’s yield dropped 23 basis points to 5.72 percent. Greek two-year yields surged to 38.5 percent.

European Union leaders are meeting on July 21 to hammer out a solution to the Greek debt crisis, which has already spread to Ireland and Portugal. While Germany wants private investors to participate in a second bailout package for Greece, Trichet says the central bank won’t accept Greek government bonds as collateral for loans in the event of a default or “credit event.”

“It is our own responsibility, our own decision,” he told CNBC. “We have proved this in the case of Ireland, Greece and Portugal, with regard to what kind of collateral we accept. So there is a certain case for independence.

See the original article >>