By Sotiris Nikas

Greek bonds are increasingly becoming worthless, which may well further delay Greece’s return to the markets, as Germany’s central bank is now refusing to accept the bonds of countries in bailout programs as collateral, according to a press report in Germany.

Up until this week Greek bonds had been used by banks to draw liquidity from eurozone central banks and the European Central Bank. However, the ECB announced on March 21 that it was giving eurozone member states’ national central banks the right to reject bonds of banks guaranteed by states that are in European Union and International Monetary Fund reform programs: Greece, Portugal and Ireland, for the time being.

In this context, the Bundesbank has become the first of the eurozone’s 17 central banks to refuse these countries’ bonds as collateral, according to a report in Friday’s Frankfurter Allgemeine Zeitung. This means that as of May, the German central bank will cease to lend to commercial banks that use Greek, Irish or Portuguese bonds as collateral.

The German daily adds that the Bundesbank has just under 500 million euros invested in Greek, Irish and Portuguese bonds.

The development is very serious as it means that even the new bonds issued by Athens to replace the old ones after the private sector involvement in the haircut will have too low a value. Already their difference in yield compared to German bunds, known as spread, has grown by more than 200 basis points in fewer than 20 days, climbing to 1,940 bps.

Consequently the Greek bond market, and therefore the country’s economy, will remain under great pressure, the negative climate will be even harder to reverse, and Greece’s return to the market will be further delayed. It also means that the credibility of the new bonds issued is no different to that of the old ones they have replaced.

What is more, Greek banks will need to gradually seek funding from other sources and not the Eurosystem, which is not at all an easy proposition.