The European Central Bank has excluded Greek bonds from QE, while Germany’s finance minister has poured cold war on an early deal. Are things about to collapse? Matthew Partridge investigates.
What’s going on?
Yesterday, the European Central Bank (ECB) decided to stop accepting Greek debt as collateral for cheap liquidity. This has hit Greek stocks. Indeed, at one point today shares in Greek banks fell by over 20%, wiping out the rally that had taken place in the preceding days.
While they have bounced back a bit, they are still down around 10% (at the time of writing). The interest rate on three year Greek bonds also shot up to 20% increasing borrowing costs.
How does the liquidity scheme work?
The ECB has a long-standing policy of lending money cheaply (at 0.05%) to European banks, provided there are sufficient assets back the loans. This is to ensure that banks that are solvent but illiquid can conduct day-to-day business.
However, since the ECB wants to reduce the risk of losing money, it won’t accept assets rated below ‘investment grade’, popularly known as ‘junk bonds’. Until now, they have allowed Greek debt, even though it doesn’t meet these criteria. It has now suddenly changed the rules so that Greek debt is now excluded.
Why does this matter?
In theory the only losers will be Greek banks looking to borrow from the ECB. Even they won’t lose out too much, since they will have access to Emergency Lending Assistance (ELA), at only a slightly higher rate of interest.
However, the decision sends a signal that the ECB is growing impatient with Greek attempts to significantly renegotiate its debts. It justified the decision by the fact that “it is currently not possible to assume a successful conclusion of the programme review”.
In other words, it thinks there is a risk that Greece it could end up defaulting and leaving the euro.
So, what do the Greeks want?
The new Greek president, Alex Tsipras, has pledged not to default on Greece’s debts. However, he argues that the repayment date needs to be extended into the future. He has also floated the idea of debt swaps that would replace current bonds with ones where repayments are linked to GDP growth.
He also argues that the Greek government should be allowed greater fiscal freedom, with an end to the supervision by the ‘Troika” of the ECB, EU and IMF. Overall, he argues that European leaders should respect the “mandate” that he has been given by Greek voters, as a result of last month’s election.
Are they likely to get this?
While some leeway on both debt and fiscal policy may be available, any concessions are likely to run into objections from Germany, which is wary of setting a precedent. Indeed, today’s talks between the German and Greek finance ministers seem to have been unproductive.
At the press conference, Wolfgang Schäuble said that the two side had only “agreed to disagree”, while Varoufakis stated that they hadn’t even agreed that!
Overall, the significance is that Greece is now seeking a bridging loan that will enable it to survive until May, suggesting that it thinks that an immediate deal is unlikely.