Rating Agencies Will Respect Greece’s “Courageous” Plans; Trichet (GS)

Bloomberg reports that ECB President Jean-Claude Trichet said on Friday that the plan laid out by Greece to cut its deficit will win backing backing of both, investors and rating agencies.

“At this stage my working assumption is the Greek government decision will be convincing,” Trichet told Bloomberg Radio in an interview on Friday. Greece’s worries could increase at the end of this year when the ECB will pull back the lending rules, which were loosened during the financial crisis. If Greece’s credit rating is cut by Moody’s Investor Service, the only rating agency left to do so, then the country’s sovereign bonds would no longer be accepted as a collateral by the ECB, which would make borrowing even more difficult for the troubled nation.

Trichet said that there is no case for judging Greece more negatively by markets and rating agencies. “Certainly, we have to look at this particular issue,” he said. “The Greek government has taken additional measures which I’d qualify as convincing and courageous.”

On March 9, Bundesbank President, Axel Webber, who is one of the contenders to take up Trichet’s post as ECB President, said that the central bank could accept Greek sovereign bonds with a lower credit rating if the bonds were applied with a higher risk premium. “It’s not necessarily the only solution to have a level of rating at which we cut off the access to the central bank,” said Weber. “We could take higher haircuts for lower ratings; we could have a more continuous collateral framework. I think that’s something that needs to be discussed, but at this juncture there is no problem,” he adds.

As of now, ECB accepts bonds rated BBB- by at least one of the rating agencies, however, effective January 1, 2011, it will accept only bonds rated A- or higher as collateral. Greece’s rating was cut to BBB+ in December by Standard & Poor’s and Fitch ratings, which are two of the three major rating agencies. The third one, Moody’s Investor Service has said that it may lower its rating from A2 to Baa1 if there was only a partial implementation of its plans to cut deficit. If this happens then Greece’s sovereign bonds would become ineligible to be accepted as collateral by ECB.

Greece revealed a few month ago, much to the horror of debt markets, that the true size of its budget deficit was much higher than previously reported The country had used complex currency swaps transactions with investment banks, including Goldman Sachs (NYSE: GS), and other tricks to hide the true size of its budget deficit.