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Sunday, July 17, 2011 10:18 PM

Trichet Repeats Nuclear Threat to Reject Greek Bonds as Collateral; Verbal Discipline or Big Bluff?

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For the nth time, Trichet says ECB would reject Greek bonds as collateral.

"If a country defaults, we will no longer be able to accept its defaulted government bonds as normal eligible collateral," he told the newspaper in an interview to be published in its Monday edition.

"The governments would then have to step in themselves to put things right ... the governments would have to take care the Eurosystem is presented with collateral that it could accept."

"There is an absolute need to improve 'verbal discipline'. The governments need to speak with one voice on such complex and sensitive issues as the crisis," Trichet said.
Verbal Discipline or Big Bluff?

Does anyone believe Trichet? Would the ECB dump its holdings of Greek bonds in a panic market?

I am suspicious about the wording "normal eligible collateral".

What about abnormal collateral, conditional collateral, temporary collateral?

The idea that verbal discipline works is nonsense. One look at sovereign debt yields in Greece, Ireland, Spain, Portugal, and Italy is proof enough.

I believe Trichet will look for some excuse to not dump Greek bonds into a panicked market should the rating agencies rule Greek debt in default. Regardless, the sooner the market puts Trichet's verbal discipline to the test, the better off Europe will be.

If Trichet is really serious, so be it. A Greek default will not be the end of the world.

Mike "Mish" Shedlock
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