ECB Update: Greece Poses Dilemma Of Shift In Collateral Rules 5  MAR   FRANKFURT - A shift in the European Central Bank's collateral rules appears more likely after President Jean-Claude Trichet on Thursday failed to confirm the central bank's intention to revert to previous rules at the end of this year. FRANKFURT (MNI) - A shift in the European Central Bank's collateral rules appears more likely after President Jean-Claude Trichet on Thursday failed to confirm the central bank's intention to revert to previous rules at the end of this year. There may even be more fundamental changes looming in rating procedure for collateral that is eligible for the ECB refi operations. Asked last January in the context of Greece's eroded credit rating whether the ECB still intended to revert to the old collateral rules at the end of this year, Trichet replied, "We will not change our collateral framework for the sake of any particular country." However, a similar question at this Thursday's press conference elicited an ambiguous response from the president: "The convincing decisions, which have been taken by the Greek government" should restore credibility in the country and its finances. Probed a second time to "repeat the comment that you gave earlier this year and late last year that you wouldn't change the collateral rules to suit Greece", Trichet said: "On the collateral, again, I said what I was expecting, taking into account the very convincing decisions taken by Greece." Rather than rejecting the possibility of a change in the rules, Trichet only addressed the potential need. The shift in language suggests the ECB may be rethinking its commitment to return to the pre-crisis framework by next year. Under existing rules, a country must have at least one credit rating above the ECB's threshold in order for its bonds to be eligible as collateral. Following the collapse of Lehman Brothers, the ECB had lowered this threshold from A- to BBB- as part of its non-conventional support measures, with the intention of returning to the old framework at the start of next year. Greek debt would still qualify under the old rules, since it has an A2 rating from Moody's. However, now that Standard & Poor's and Fitch have cut their rating to BBB+, a downward revision from Moody's would create problems if the ECB returned to its initial threshold. This situation illustrates the tremendous influence a single rating agency could have in determining whether Greece -- or any other Eurozone country facing credibility problems in future -- would qualify under the ECB's collateral rules. In the view of Governing Council member Ewald Nowotny this is "an unacceptable situation." Raising issue a few days before the Council meeting, he said, "The destiny of Greece and, to be dramatic, the destiny of Europe, depends really on one rating agency." Asked at the press conference whether he shared Nowotny's concerns about "the role rating agencies continue to play in [the ECB's] collateral arrangements," Trichet again dodged the question, saying he had no comment to make "at this stage." Pressed on the idea that the ECB could develop its own set of ratings for countries, Trichet again equivocated: "I have no particular comment on your question on rating agencies at this stage." The repeated use of the phrase "at this stage" suggests that the central bank is reviewing the situation and needs time to come up with a solution. How a new rating system might look is unclear. One idea is for the ECB to introduce a sliding scale, whereby collateral with lower ratings would be accepted, but with a larger haircut. While cushioning the impact of downgrades, this option would still leave much control in the hands of the U.S. rating agencies, whose credibility has been undermined during the crisis. Earlier this week the German business daily Handelsblatt reported that Eurozone finance ministers would like the ECB to develop its own credit ratings. In cases where independent ratings are not available for some financial instruments, the ECB already relies on those provided by the Eurozone national central banks. However, ECB authorities may well be reluctant to take on the role of sole arbiter of a member country's eligibility for central bank credit, as it would place it in a very delicate position, potentially subject to enormous political and public pressure. Rather than remaining above the political fray, the ECB could be seen as the task-master imposing unpopular austerity measures, a role monetary officials would no doubt prefer to leave to the European Commission and the Eurozone finance ministers. It is much more comfortable for Trichet to insist, as he does with increasing vehemence, that Eurozone governments must adhere strictly to the rules they have imposed themselves via the Growth and Stability Pact. But as the Greek credit crisis has once again focused attention on the exorbitant influence of a handful of rating agencies, the ECB will have to grapple with the problem at some point. --Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com [TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$] 3/5/2010 10:11:00 AM