ECB suspends criteria for lending to Greek banks

The European Central Bank suspended benchmark criteria for lending to Greek banks yesterday in an abrupt about-face which offers relief to the Greek government but might undermine the euro.

The eurozone central bank decided to enable the Greek commercial banking system to access precious central bank funds without having to meet tough collateral criteria which until now have formed part of the basis of the ECB's credibility.

The ECB governing council "decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for the purposes of the Eurosystem's credit operations in the case of marketable debt instruments issued or guaranteed by the Greek government," a statement said.

The unprecedented move will remain in effect "until further notice" and allows banks in Greece and elsewhere to keep borrowing ECB cash using Greek government bonds and other instruments as collateral despite their degraded credit ratings to "junk" bond status.

Last week, Standard & Poor's slashed Greece's sovereign credit status to junk levels, threatening to cripple the country's chance of avoiding default.

The ECB's move came less than four months after ECB president Jean-Claude Trichet insisted the bank would not amend collateral policy just for Greece.

"We will not change our collateral framework for the sake of any particular country," Mr Trichet said on January 14 in response to a question about the debt-ridden country. "That is crystal clear," he had stressed.

Central bank credibility is a crucial asset, and the ECB has now been forced to change course by the threat of the Greek crisis spreading to other parts of the 16-nation eurozone.

UniCredit chief economist Marco Annunziata said last week that the ECB had been "openly accused of caving in to political pressure and betraying the Bundesbank's heritage," a reference to Germany's central bank, on which the ECB was modelled.

With Europe's economy lagging behind in the global economic recovery, the Greek crisis and its handling by European leaders has done severe damage to the continent's image.

Greece is being crushed by some €300 billion in debt, and has run up a public deficit that might have reached 14 per cent of the country's output.

On Sunday, European governments finally endorsed a historic €110 billion bailout with the International Monetary Fund, the biggest ever financing for a single country, to save Athens from bankruptcy and shore up the European single currency.

"European Monetary Union was a political initiative to begin with, and politics has come to the rescue in order to prevent an unravelling of the project," ING rates strategist Padhraic Garvey noted.