A threat by the ECB to stop accepting Greek bonds as collateral if Greece restructures its debt could see tensions flare in eurozone money markets, but a move to levels hit at the peak of the crisis is seen unlikely. European Central Bank Executive Board member Juergen Stark issued the warning on collateral on Wednesday and a German daily reported that central bank President Jean-Claude Trichet had made a similar remark at a closed-door meeting in Brussels.
Money markets did not immediately react to the comments as, for the moment, traders see them only as an attempt by the ECB to halt the momentum towards a debt restructuring, an idea to which European Union politicians are increasingly open. Greek banks rely on the system of collateral to fund themselves and the ECB refusing to accept government bonds as security will seriously threaten their survival chances. Strategists say such a hit taken by the Greek banking sector could immediately spread throughout the entire eurozone system. If Greece restructured its debt, the risk would be that investors questioned which country was next in line, with Ireland and Portugal - and their banks - the likely victims.
As Spain has significant exposure to the Portuguese banks, it is possible that Spanish banks can be shut out of interbank markets, at which point contagion across the eurozone would be hard to stop as Spain is deemed by many as 'too big to bail'. "You can say Portuguese and Irish banks are already shut out from interbank markets, but Spanish banks can be affected and I imagine that this type of action can recreate tension in the interbank market," said Alessandro Giansanti, strategist at ING.
Economists doubt the spread can reach those levels again if the ECB does reject Greek bonds as collateral, as banks that hold government paper issued by other states would be able to access ECB funding immediately in case of emergency. Also, the chain of reaction would be long enough to give time for EU politicians to intervene and break it and for banks to prepare. "(The impact) should be lower than at the start of the crisis, because back then it was a first-time shock, while this time it would be within a context," said UniCredit strategist Luca Cazzulani.