ECB could maintain liquidity lifeline

ECB could maintain liquidity lifeline

The European Central Bank’s presence in the Greek bond market will continue until the end of 2023, regardless of what will be decided about the bank’s emergency bond buying program, the ECB’s chief economist said Thursday.

In an interview with Reuters, Philip Lane said the ECB would reinvest when the bonds that it holds in its portfolio as part of the €1.85 trillion Pandemic Emergency Purchase Program (PEPP) mature and it would do so at least until the end of 2023. Therefore, the ECB will have a significant presence in the Greek bond market, irrespective of what happens with the bank’s regular Asset Purchase Program (APP).

Greek bonds are part of PEPP, but not APP because they are below investment grade.

Officials in Athens, Frankfurt and Brussels are soon expected to discuss the possibility of the ECB continuing to provide Greek banks with plentiful and cheap funding when PEPP expires in March 2022, unless it is extended. Replacing maturing bonds with new ones helps Greece keep borrowing costs from markets low and buy time until its debt regains its investment grade rating, something the government expects to happen in the first half of 2023.

Bank of Greece Governor Yannis Stournaras thinks conditions now permit the country’s participation in the ECB’s qualitative easing programs, even if the country’s debt is still rated below investment grade. There’s no question Athens will do all it can to remain under the ECB’s umbrella until it can bring its rating up; the functioning of the whole economy depends on that.

What Lane, a former governor of the Central Bank of Ireland from 2015 to 2019, said could provide a transition until the debt upgrade. The question is whether this will mean the continuation of Greece’s enhanced surveillance status, a sort of purgatory that followed the end of the third austerity program it had signed with its creditors. While the government had hoped to exit this status in June 2022, officials in Athens believe that enhanced surveillance may need to be extended to appease the hawks on the ECB’s Executive Board.

By early August, the ECB had bought €29.42 billion worth of Greek bonds, or over a third of the country’s debt issues. This has contributed to the bond yields achieving historic lows, easing the burden of managing the debt.

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