Tett: in future, Greek Bonds may no longer be used in money market operations

"But that tells only part of the tale: another factor that has also been hurting the Greek bond price is a subtle - albeit geeky - discussion that is quietly underway now at the European Central Bank in relation to its collateral policy, and exit strategies.

Back in the autumn of 2008, after the collapse of Lehman Brothers, the ECB loosened the rules that govern how banks can get central bank funds. In particular, it let banks use government bonds rated BBB or above in ECB money market operations, instead of accepting bonds rated A-, or better.

This was initially presented as a "temporary" policy, slated to last until late 2009. But last year the ECB extended the policy until the end of 2010. Thus, during 2009, banks which were holding Greek bonds have been merrily exchanging these for other assets via the ECB - which, in turn, has helped support Greek bond price (and, by extension, Greek banks that hold a large chunk of outstanding Greek bonds).

Until recently, many observers thought - or hoped - that this policy would be extended again, perhaps until 2011 or beyond. For although Greek debt currently has a credit rating that meets the old ECB rules, there is a good chance the debt will be downgraded this year - which creates the risk that Greek bonds will be excluded from any newly tightened ECB regime.

However, earlier this year, senior ECB officials indicated that they intended to "normalise" the policy, as planned, at the end of 2010, as part of a package of exit policies. Thus, a potential source of support for Greek debt now looks threatened. This, has spooked investors, such as German insurance companies, which also hold large chunks of Greek bonds..."