What does Athens want from the ECB’s ‘shield’ mechanism?

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By Tasos Dasopoulos

Athens is eagerly awaiting the completion of planning and the implementation of the ECB’s new “cutter” for the spreads of over-indebted Eurozone countries, in view of the first increase in interest rates within the month, as Greek bonds are the only European bonds that do not they are investment grade.

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The Ministry of Finance fears that if the rules for the ECB’s intervention are not clarified within the next 2-3 weeks, then the markets will try to test the ECB by putting too much pressure on the “weak links” of the Eurozone: Italy and Greece. The neighboring country will face a comparatively bigger problem, as for the next quarter it will have to refinance a debt of 204 billion euros. Therefore, if lending rates continue to rise, it may find itself facing a debt crisis.

Greece has a different problem. It is known to have cash reserves of around 39.5 billion euros and can potentially cover financing needs for more than three years (given the very low annual financing needs). However, it should also support those who put their trust back into Greek bonds from 2019, after a big rise in interest rates, if they see their investment losing value. In addition, for Greece there is also the fear that due to the lack of investment grade, the rise in lending rates could reach prohibitive heights, excluding it, even temporarily, from the markets.

Immediate intervention

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The plan for “early” intervention by the ECB from today in the bond market of the European south revealed by Reuters yesterday, has calmed the market, with the yield of the Greek 10-year bond retreating after noon yesterday to 3.66% from 3.80 % which was a day ago. Accordingly, the yield on the Italian ten-year bond fell to 3.4% from 3.65% on Wednesday.

According to the Reuters report, the support will come from a “flexibility” in the reinvestment provided for the bonds bought by the ECB through the PEPP. Instead of implementing the debt buyback across the board as agreed, it will stop it for countries that don’t have a problem with rising interest rates (such as Germany, France and the Netherlands) and collect the price of the bonds. With this money, it will buy bonds of Italy, Greece, but also Spain and Portugal, so that spreads against the German Bund do not increase too much. However, this also concerns a temporary solution that can cover the gap until the ECB takes its final decisions on the final form of the intervention it will present next month. This is because, with the interim regime, the Central Bank of Germany will start piling up low-rated Italian, Greek, Spanish and Portuguese bonds, which cannot be accepted for a long time.

This, given that immediately after the extraordinary meeting of the ECB on June 15, the announcements about interest rate increases and the creation of a tool to equalize the spreads of the European South, the first objections came from Germany. German Finance Minister Christian Lindner called for safeguards for any ECB interventions. In other words, the countries that will benefit from the intervention of the Central Bank of the Euro, should also commit to their economic policy. The ECB administration immediately agreed to go ahead with the venture and is now launching a preliminary intervention without these safeguards. Therefore, decisions on the new tool should come soon.

Source: Capital

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