Embarrassment for banking shares in view of ECB for Greek bonds

By Leonidas Stergiou

The ECB may meet on Thursday for monetary policy decisions, but its executive members are meeting to try to find the “golden section” in a difficult equation. This uncertainty tests the shares of Greek banks, which have significant exposure to government bonds and the ECB’s PEPP program.

ECB economists are not proposing changes to monetary policy, as growth is fragile and inflation is temporary. According to his information Capital.gr, the revised forecasts for inflation in 2022 will move to 1.4%. But the postponement of decisions and positions will give way to speculation and uncertainty, while the voices from Germany will erupt with inflation of 6%, which is asking for a brake on the printing of money, at least.

Therefore, a decision is expected with clear messages to the markets, but also with political balances.

The Lagarde line

The position of the head of the ECB, Ms. Christine Lagarde, is that on Thursday the ECB should give clear answers to all questions so as not to leave room for uncertainty. The ECB must also show that it can decide and take into account the rise in inflation, with Germany as the main recipient. On the other hand, it can not take action against transient inflation that will jeopardize growth, given the uncertainties associated with the pandemic and supply chain problems. Thus, he may not talk about interest rates, but he may talk about restricting the extraordinary purchase of PEPP bonds. This statement will be more political than essential for liquidity, given how PEPP works (there is no expiration date for liquidity returns).

Furthermore, it has not been decided whether the purchases through PEPP will be reduced or whether the program will be extended after March or will be replaced, for example by increasing the bond purchases through the traditional APP or QE mechanism.

The case of Greece

Of course, these solutions may not help Greece and it is likely that the PEPP expires in March. A vague report on PEPP and Greek bonds on Thursday will refer to the decisions in February, a month before the end of the program, sparking uncertainty and speculation.

For this reason, sources of Capital.gr express the assessment that on Thursday there will be a road map for Greek bonds. After all, it is this uncertainty that pushes banking stocks and creates upward trends in the yield curves. Greek banks with an exposure of more than 35 billion euros in Greek bonds are considered vulnerable in the event of an increase in yields and a decrease in prices due to the valuation of their portfolios.

QE and APP

Reliable sources of Capital.gr in Frankfurt and Brussels confirm the information that Greek bonds want not to be included in the traditional liquidity mechanism APP and QE, as well as the news that political pressure is exerted for exceptions, such as the countries of the south. The latter is technically easier to implement, but has already provoked strong political reactions inside and outside the ECB, as it creates a two-speed monetary policy, not just a two-speed Eurozone.

Although this solution has not been rejected, the discussion focuses on how Greek banks can continue to benefit from liquidity, without QE and APP, after the expiration of the extraordinary PEPP bond purchase program in March 2022.

Regardless of the solution, the ECB believes that Thursday’s decisions must be given direction, because postponing the solution for later will fuel speculation and uncertainty, as the end of the program comes to an end.

Therefore, the fact today is that the ECB will continue to buy Greek bonds until March, increasing the total amount to 40 billion euros, according to information from Capital.gr.

The scenario of the informal extension after March

At this point, the facilities considered in the case of Greece are the following:

First, securities purchased by the ECB and expiring after March 2022 can be exchanged for new ones. Therefore, the liquidity stock of 40 billion will remain stable.

Secondly, there is no expiration date for the bonds, ie the banks have to take back the bonds and return the liquidity. Repayments can be made much later than the end of the PEPP, so this liquidity can be used for a long time after the end of the program in March 2022. Of course, this is still true today, as this is how PEPP was designed. However, there will be a clear clarification and additional possibility for refinancing the expiring securities.

It is noted that in PEPP Greece has included interest-bearing bills that have a short duration and are renewed.

The scenario of geographical grouping

The second scenario provides flexible criteria for the countries of the south, something that the Greek side insists on at the political level, through Brussels and Frankfurt. This solution helps other countries with high public debt. However, both the members of the ECB and the countries of the Eurogroup and the ESM remain convinced.

According to information from Capital.gr, reactions are expressed not only by Germany, but also by Spain. ECB Vice President de Guido reportedly prefers to extend the PEPP or provide facilities. The German side reacts to the extension of the PEPP and even calls for the restriction of markets, arguing that this program was temporary for the pandemic period. Now, the economies are open, growth is running, inflation has returned and, consequently, there is no reason for PEPP to exist.