The ECB will continue to accept Greek bonds

LAST UPDATE 13:30

The Governing Council of the European Central Bank has decided to continue to allow national central banks to accept as eligible collateral Greek government bonds that do not meet the minimum Eurosystem credit rating requirements but meet other eligibility criteria. for at least as long as the reinvestment of Greek government bonds continues under the extraordinary asset purchase program due to pandemic (PEPP).

It is recalled that the ECB intends to reinvest the amounts of capital from the repayment of securities acquired under PEPP at maturity at least until the end of 2024.

The measure became known in the context of the ECB’s announcement of the gradual withdrawal, in three steps, of the interim measures it introduced in April 2020 to deal with the pandemic.

In particular, the Governing Council of the ECB decided to phase out the pandemic bailout package which will take effect in April 2020. This phasing-out gives the Eurosystem counterparties ample time to adjust, the ECB said.

Removal is scheduled to take place in the following three steps.

Step 1: From July 8, 2022 the ECB will implement a series of decisions. First, it will halve the temporary reduction in haircuts in the valuation of collateral on all assets from the current 20% to 10%.

Second, the ECB will no longer maintain the adequacy of marketable assets that met the minimum credit quality requirements on 7 April 2020, but whose credit ratings subsequently deteriorated below the threshold.

Third, the ECB will re-establish the threshold for unsecured debt securities issued by any other banking group in a credit institution’s collateral collection from 10% to 2.5%, as was the case before April 2020.

Fourth, the ECB will phase out the temporary easing of certain technical requirements for the eligibility of additional credit requirements (ACC).

Step 2: In June 2023 The ECB expects to implement a new haircut program in valuation [των εξασφαλίσεων] based on the level of risk tolerance before the outbreak of the pandemic, gradually abolishing the 10% reduction. Details will be announced in due course.

Step 3: In March 2024the ECB will phase out the remaining relaxation measures.

Significant support for Greek bonds

The extension of the special waiver, given by the European Central Bank in April 2020 so that Greek bonds are accepted as collateral for Eurosystem financing operations, is an important support for Greek bonds but also for Greek banks, especially in this new environment where the pressures have increased by sending the Greek spreads to 223 basis points, compared to below 100 bp that was moving just last summer.

The extension was announced by ECB Vice President Luis de Guidos earlier this week, but Bank of Greece Governor Giannis Stournaras has long said that the extension of the PEPP reinvestment program decided by the ECB in December which will essentially continue to buy Greek bonds until the end of 2024 at least, automatically means that the waiver will be extended.

According to banking sources, it is important for someone who buys Greek bonds to know that they can at any time exchange them with the ECB and receive liquidity at a cost similar to that of other countries. If the waiver did not get an extension, this important “security” would be lost and it is almost certain that it would lead to increased pressures on Greek bonds, as well as the cost of borrowing of the Greek State and companies.

For about two years now, waiver has allowed Greek banks holding Greek securities in their portfolios to deposit them with the ECB, drawing liquidity at an interest rate of -0.5% to -1%, as Greek bonds are accepted. without a big “haircut”, thus enhancing in addition to their liquidity and income. However, despite the fact that Greek banks have benefited significantly from ECB financing, their financing and liquidity have improved in recent years, supported by increased deposits and better access to markets, with lending ratios to deposits to be significantly below 100%.

Bank of America has recently noted that “more important is the ECB’s decision on the waiver it has given to Greece, accepting Greek bonds as collateral, regardless of whether or not the country participates in any program. quantitative easing “. Greek banks have increased their lending through cheap long-term financing programs TLTRO, by 39 billion euros from the end of 2019 to 47 billion euros today, while buying 10 billion euros of Greek government bonds, while their positions in Greek bonds reach 30 billion euros. “If the waiver is not extended, there is a risk that Greek banks will proceed with sales of Greek bonds,” the American bank had noted.

However, rating agencies had discounted this positive outcome, with Fitch estimating in a recent report that the ECB will extend the waiver to include Greek public debt as collateral in repos beyond June.