Posted on February 5, 2015 by the XM Investment Research Desk at 10:52 am GMT
The news that the ECB would cease accepting Greek government bonds for regular refinancing operations came as a negative surprise for the euro and for risk assets more broadly. The news did not mean that the ECB will no longer provide liquidity to Greek banks, but that banks in need of liquidity and in possession of Greek government bonds would have to apply to the Emergency Liquidity Assistance (ELA) program. This would entail a higher interest cost – about 100 to 150 basis points above the regular refinancing rate of 0.05%- and the debt would go on the national central bank’s balance sheet (Bank of Greece). Although the amount of bonds involved is not huge relative to overall funding – around 8 billion euros out of total central bank Eurosystem funding of 56 billion – it means that this portion of funding will have to switch to the ELA program.
The move was a surprise as such a step was not expected before the end of February and some analysts were even anticipating an extension by a few months so as to give time to the new government to strike a deal with its lenders. Instead it seems that the ECB will be strict in sticking to its rulebook and protecting its independence. This could complicate the efforts to reach a political compromise as pressure on the ECB to make concessions and give extra time could very well be rebuffed. The ECB also has the power to restrict or even to close down ELA itself under certain conditions if the standoff between Greece and its creditors is not resolved and this would have implications on Greece’s ability to continue as a member of the Eurozone.
The fact that the ECB’s move took place following a meeting between Greek Finance Minister Yanis Varoufakis and ECB President Mario Draghi could be a sign of future tension between Greece and the ECB. The move could have been unrelated to the meeting as there was a scheduled non-monetary policy meeting of the Governing Council in Frankfurt anyway yesterday, but in any case Draghi’s colleagues were apparently unhappy with developments on Greece in order to proceed with this step. The step was taken as there was now a risk that Greece and its lenders would not reach a successful review of the program, according to the ECB announcement. Certainly the new Greek government’s first policy steps such as increasing the minimum wage, increasing pensions, scrapping the privatization program and re-hiring fired public workers complicate a “successful program review” that the ECB has as a prerequisite for such funding.
The news drove the euro down from around 1.1430 to a low of 1.1303 before subsequently recovering to 1.1387. The euro had been previously boosted by proposals out of Athens that involved the swap of its existing debt with new securities rather than a debt writeoff.