ECB opens door to indirect Greece aid

… Greek politicians finally signed up…

…. If the ECB distributes part of its profits …, that's not monetary financing,…

… the December operation had averted a major credit crunch…

By Eva Kuehnen

FRANKFURT | Thu Feb 9, 2012 1:08pm EST

(Reuters) - European Central Bank President Mario Draghi opened the door on Thursday to helping Athens indirectly after Greek politicians finally signed up to an austerity package following days of dither and delay.

Greece, which needed the deal to secure a new bailout and avoid a ruinous default, has urged the ECB to hand back profits on Greek bonds it holds - a move that could raise 12 billion euros or more to help fill a gap in its financing needs.

The austerity plan, along with a voluntary reduction in the value of private creditors' Greek bonds and any ECB help, is aimed at cutting Athens's debt from 160 percent of GDP to 120 percent by 2020. Draghi said a private sector deal was close.

But its international lenders believe the deal agreed back in October, which has been wrangled over ever since, will no longer fill the Greek financial hole.

After the ECB left interest rates at a record low 1.0 percent, Draghi spent much of his hour-long news conference refusing to show his hand, before indicating at the very end that the bank could pass profits from its Greek bonds to euro zone countries.

The countries could then funnel the money to Greece. The ECB is forbidden from financing governments directly.

"If the ECB gives money to governments, that's monetary financing. If the ECB distributes part of its profits to its member countries as part of the capital key, that's not monetary financing," Draghi said.

The capital key refers to the ECB's measure of countries' stakes in its financing based on economic size and population. Those euro zone countries could then choose whether to pass on the profits to Greece they received from the ECB.

The ECB has spent about 38 billion euros on Greek government bonds, which have a face value of about 50 billion, and has also already received interest payments on some of those bonds.

"On Greece, the ECB seems likely to make the potential profit from its Greek bond holdings available to its shareholders," said Berenberg Bank economist Christian Schulz.

Draghi, who will attend a meeting of euro zone finance ministers later on Thursday to discuss the 130 billion euros bailout, said Greek Prime Minister Lucas Papademos had confirmed to him that the Greek parties had endorsed a deal, as demanded by their European Union and International Monetary Fund lenders.

The euro rose against the dollar on the news to a new 2-month peak of $1.3321.

GREEN SHOOTS?

Draghi said the ECB still saw "downside risks" to the economic outlook but he omitted the word "substantial" when describing these, a nuance that analysts said reduced the chances of a March rate cut.

"A slight weakening of the easing bias," ING economist Carsten Brzeski said of the change in language.

A Reuters poll of economists conducted after Thursday's policy meeting showed that they expect the ECB to hold interest rates in March and may well keep them on hold for the rest of the year.

The ECB's 23-member Governing Council did not even debate a rate cut - this month, or next.

"We frankly didn't discuss any prospective or current change in interest rates," Draghi said. "Available survey indicators confirm some tentative signs of stabilization in economic activity at (a) low level around the turn of the year."

Since the beginning of the year, some business surveys have fostered hope that the worst of the sovereign debt crisis has blown over and the euro zone economy is perking up.

Draghi said these were only fledgling signs, suggesting rates could yet fall below 1.0 percent, into uncharted territory.

Many analysts say that as the March 8 meeting comes soon after the ECB's second three-year liquidity operation on February 29, the bank will want to wait longer than that before moving rates, which it has not previously cut below 1.0 percent.

The central bank funneled banks 489 billion euros at a first three-year ultra-cheap loan operation in December, a measure that had gone a long way to calm financial market turmoil, and will repeat the offer in three weeks.

Draghi noted expert opinion expected a similar take-up this month. He recently said the December operation had averted a major credit crunch.

Francesco Papadia, a top ECB official, said on Wednesday bank liquidity concerns had all but disappeared thanks to the ECB's December three-year loans, adding that he was tempted to declare 'mission accomplished'.

(Additional reporting by Paul Carrel, Sakari Suoninen, Marc Jones, Clare Kane, Anna Willard, Jeremy Gaunt and Patrick Graham. Writing by Mike Peacock.)