European Central Bank President Mario Draghi threw a lifeline to local lenders on Friday as the ECB has decided to include bonds issued by the European Financial Stability Facility (EFSF) – of which there are more than 30 billion euros in Greek lenders’ portfolios – in the list of securities the ECB can buy in its quantitative easing program.
The decision, which will provide a huge cash boost to Greece’s credit sector, provides for the purchase of up to 50 percent of the above bonds held by the country’s banks. The total value of those bonds held by Greek banks amounts to 37 billion euros, and according to estimates the local lenders stand to benefit to the tune of 650 to 900 million euros, depending on the acquisition price. That benefit will further strengthen the capital bases of domestic lenders.
The EFSF bonds were issued in the context of the first bank recapitalization in 2013, while the banks also received additional EFSF bonds to plug the financing gap between the healthy parts of the banks absorbed by the systemic lenders and the bad parts that were put into resolution.
Local banks will have a double advantage from selling the EFSF bonds to the ECB. First, they will immediately make a considerable amount from the sale of up to 50 percent of the bonds they hold, as current prices are significantly higher than the prices in their books. Second, although the ECB has not yet approved it, banks hope that they will be able to factor in the current price of their remaining EFSF bonds that will not be sold based on the price of those that the ECB buys.
Notably, the above move is not associated with the bailout review as it concerns a market of bonds with a high credit rating, and not Greek bonds, which will only see a boost once the review has been completed as then they will likely become acceptable collateral for the ECB to release cheap liquidity to the country’s lenders and enter the quantitative easing program of bond buying.