‘Shield’ for the Greek economy by the ECB

By Tasos Dasopoulos

The President of the European Central Bank, Christine Lagarde, secured much more than the provision of cheap loans for 2022 for Greece yesterday with the special written report covering the Greek bonds with the emergency purchase program due to the pandemic (PEPP) and after on March.

The markets responded immediately with relief, reducing the spread of Greek bonds by 2 basis points, on the day that the corresponding Italian increased by 6 basis points. Yesterday’s decision was preceded by an anxious 20-day period, in which both the Bank of Greece and the ECB themselves sought a solution with a legal basis for the continuation of the Greek bond markets after the end of the PEPP.

Rumors in recent days have been that a legally substantiated position that can support the continuation of Greek bond purchases after the emergency bond purchase program due to the pandemic after March has not been found. This despite the efforts of the Bank of Greece, which pointed out to all institutions in Frankfurt and Athens that Greek bonds should not be suddenly excluded from the markets, after two years of participation in PEPP. And this is because if there was no pandemic, Greece would have already been upgraded to the investment level.

As it seems in the ECB, the solution of the extension under conditions of the PEPP for Greece was finally found, something that had, as Mrs. Lagarde herself said, the strong support of the monetary policy council.

The extra profits

The gain from the decision goes beyond the obvious: That is, maintaining the possibility of cheap borrowing for the Greek government for the whole of 2022. Yesterday’s statement by Ms. Lagarde had the character of a vote of confidence with the President of the ECB pointing out – unnecessarily – the Greece’s success in promoting reforms is also evidenced by the positive assessments of the European Commission.

The support, although more or less expected, will have a positive response in four other areas:

– It will be a signal to the rating agencies, which recently postponed their ratings for Greece, that the ECB supports Greece as if it had the investment grade. This is given that the Central Bank of the Euro yesterday created a clause specifically to cover Greece, something that is not at all common for the data of the central bank.

– It strengthens the positive scenario for the country towards the markets, which are expected to continue to support the issuance of Greek bonds in 2022. The issues are expected to reach or even exceed 12 billion euros. It also paves the way for Greece’s integration into the emerging market of “green” bonds from the second half of 2022.

– Significantly helps the liquidity of Greek banks, at a very critical point. This is because, despite the improvement of their liquidity in recent years, they will need more liquidity, as 2022 will be the first year of effective implementation of the Recovery Fund in which they will participate with funding of 8 billion euros. They will also be called upon to finance much of the € 30 billion investment expected next year.

-Finally, the support of Greece from the ECB, adds credibility to the Greek positions, which will be very useful in the difficult negotiations of the financial staff in the coming months for changes in fiscal rules and the smooth transition to the post-Covid era.