European Central Bank Governing Council member George Provopoulos has backed a call for the bank to consider accepting lower rated bonds as security for loans if a higher risk margin is charged.
Assigning a bigger so-called haircut to debt perceived as riskier and rated lower by credit agencies would ease pressure on Greek banks, given Greek sovereign bonds are nearing the ECB's collateral cut-off, and also avert criticism that the rules encourage dependence on just one ratings agency.
In an interview with Reuters, Provopoulos also said he sees banks paying close to the ECB's benchmark interest rate, now 1 percent, for three-month funds even after the ECB returns to a competitive auction process as part of its phasing out of crisis lending measures.
Provopoulos' fellow Governing Council member Axel Weber called earlier this week for more discussion about an increased role for risk margins, or haircuts, in how the ECB treats assets submitted as security in its lending operations.
Analysts have welcomed the idea as giving the ECB more options, and Provopoulos said it should be studied closely.
There is room for consideration about the feasibility of applying larger haircuts against lower credit ratings on collateral, said Provopoulos, who is also the governor for the Greek central bank.
Governor Weber's idea is deserving of examination and assessment, he said, and added: If events show that some rules have to be replaced by better ones, then existing rules should be changed.
Next year, bonds must be rated at least single-A by one agency to be eligible as collateral for ECB borrowing. Moody's is the only agency to rate Greek debt above this level currently.
During the interview, conducted on Thursday, Provopoulos also said he was not concerned Greece would be further downgraded, as music blaring from street protests against savings measures was clearly audible.
Provopoulos said price stability is foremost in policymakers' minds when removing financial sector support measures and phasing-out would be gradual and progressive.
The ECB said last week the one-week and one-month liquidity operations would stay in full allotment until at least October and Provopoulos said the decision followed comprehensive discussions in the Governing Council.
It was too early to say whether the full allotment policy in short-term tenders could be extended beyond October, he said.
Overnight interest rates will remain close to the deposit rate, now 0.25 percent, in the near future, Provopoulos said.
The large amount of liquidity on the market, along with the fact that the interbank market is not yet fully back to normal, will keep the EONIA close to the rate on the deposit facility.
Bid rates on three-month tenders are expected to be close to the main refinancing rate after auctions are reintroduced, Provopoulos said, and added EONIA would rise as markets normalize and become less dependent on ECB liquidity.
Given the full allotments and fixed rates on the shorter-term operations, and the abundant liquidity supplied by the ECB, I would expect to see bid rates on the 3-month tenders to be close to the MRO rate.
Provopoulos also said ideas of forming a European Monetary Fund were not fully enough presented to form an opinion, and that the Stability and Growth Pact should be respected.
Let's see what details might emerge and then we can discuss it, he said.
If we ... had abided by the present rules, there might not be a call for new institutions such as a European Monetary Fund, he said, adding Greece was not the lone offender.
Provopoulos also said current interest rates are appropriate and that future rate decisions would be done based on inflation.
We have a single needle in our compass -- price stability. Any change in our policy stance will depend upon our achieving that objective, he said in his wood-paneled office, decorated with maritime-themed paintings by the famed Greek artist Volanakis.
He said euro-zone economic recovery was on track, despite cold weather putting a damper on the beginning of this year.
(Editing by Toby Chopra)