ECB stops accepting Greek bonds

The European Central Bank Tuesday temporarily suspended the use of Greek government bonds by banks as collateral to get loans from the central bank.

The move follows an announcement Monday by ratings agency Standard & Poor's Monday to declare that the deal Greece reached for debt relief with its private lenders in order to avoid a default amounts to a default, at least technically, anyway.

It downgraded the countrys long-term credit rating from CC to SD, or selective default.

Before the escalation of Europe's debt crisis, the European Central Bank would not lend to a country which was in default.

But it was unclear whether the move by S&P would change anything, given that the ECB has already moved to use hundreds of billions of dollars to shore up banks which in turn have used those funds to support borrowing by distressed economies such as Greece anyway.

The Greek government and representatives of its private creditors reached a deal a week ago that would force bondholders to exchange their Greek government bonds with new ones with a 53.5 per cent lower face value, longer maturities and lower interest rates.

Default rating temporary

The default rating is in effect until those new bonds are given rating by agencies.

Whether Greece actually defaults, in the sense of triggering a process where creditors begin a process of lining up to retrieve what value they can from their bonds, depends on whether enough lenders vote to accept the debt swap, something which must be decided by about March 10.

The deal was designed to cut Greece's debt by 107 billion ($143 billion Canadian) off its private debt and was agreed to because the country couldn't pay off the full amount anyway.

The deal is a requirement in order for Greece to get a second bailout from its European Union partners and the International Monetary Fund, under which it will receive 130 billion ($174 billion) in rescue loans in return for further harsh austerity measures.

The effect, says S&P, is still a default on the original bonds even if Greece still repays its debts under the news terms in full and on time.

The new terms "diminish bondholders' bargaining power" in the upcoming debt swap, it said.

Ireland to hold fiscal pact referendum

Also on Tuesday, Ireland's Prime Minister announced his government will hold a referendum of whether to sign on with the European Unions new fiscal treaty designed to increase the EUs power to enforce fiscal discipline over its 17 member countries.

Enda Kenny said advice from Ireland's senior law officer, Attorney General Maire Whelan, suggested that the government is bound by the constitution to hold the vote.

Kenny said it would be held "in the coming weeks."

"I am very confident that, when the importance and merits of this treaty are communicated to the Irish people, they will endorse it emphatically by voting 'yes' to continued economic stability and recovery," Kenny told Ireland's parliament.

The fiscal treaty was struck last month by 25 of the 27 EU Countries, with the United Kingdom and Czech Republic the only holdouts.

The treaty requires eurozone countries to pass national laws that trigger an automatic correction mechanism if a country's structural deficit rises above 0.5 per cent of economic output unless it finds itself in a severe recession.

The agreement also calls for members who fail to ratify the pact by March 2013 to be blocked from receiving funds from the eurozone's European Stability Mechanism. Ireland could also be prevented from receiving more EU loans once its current bailout agreement runs dry next year.

In another development in Europes debt crisis Tuesday, the 17 eurozone leaders delayed a decision on whether to give their bailout funds more firepower until later in March.

There are concerns that the eurozone's rescue fundswhich have already rescued Greece, Ireland and Portugal are too weak to support large struggling countries like Italy or Spain, unless they are enlarged to give more than 500 billion ($670 billion) in loans.