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The European Central Bank should revise its collateral rules after a series of rating downgrades left Moody’s Investors Service holding a veto over Greece’s access to ECB loans, Goldman Sachs Group Inc. said.

“This is a bizarre and ultimately untenable situation for the ECB,” said Erik Nielsen, Goldman’s chief European economist in London, in a note late yesterday. “Unless we get a major improvement in the Greek fiscal outlook during the next few months, the ECB would want to rectify the situation.”

The eligibility of Greek government bonds is in doubt after Standard & Poor’s on Dec. 16 joined Fitch Ratings in downgrading its debt to BBB+. A Moody’s cut to Baa1, a move of three notches from the current grade, would mean Greek bonds won’t be accepted by the ECB if it reverts as planned to its pre-crisis collateral rules in a year’s time.

The ECB currently accepts bonds rated BBB- as collateral after relaxing its rules in response to the financial crisis.

“The unthinkable — that the ECB would not accept sovereign securities from a member as collateral — has become a measurable risk, and one exclusively controlled by Moody’s,” Nielsen said. Moody’s is now the “de factor decision maker on Greek eligibility.”

Greek bonds have plunged in the past two weeks, partly as rating companies questioned the government’s ability to cut a budget deficit that’s the highest in the European Union poor credit personal loans. S&P cut Greece’s credit rating on concern measures to fix the budget don’t go far enough.

ECB Call

ECB Vice President Lucas Papademos said today the Greek government needs to take “substantial” and “courageous” decisions to cut its deficit.

The yield on the 10-year Greek government bond has jumped around 70 basis points to 5.70 percent this month.

The move left Moody’s the only major agency with an A1 rating on Greece’s debt, three levels higher than the Fitch Ratings and S&P grades.

Goldman’s Nielsen said the ECB should change its rules so that ratings of two out of three rating companies comply with its collateral requirement.

This would “remove the inappropriate veto right of any of the three agencies,” he said. “The ECB should make its existing rules as well as any future revisions explicit and public. Clarity and transparency serve all institutions well.”

The ECB said on Dec. 16 it loaned banks 96.9 billion euros ($139.5 billion) at its last tender of unlimited funds over 12 months, more than the 75 billion euros forecast by a Bloomberg News survey of economists.

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