Greek ambition to slip bailout shackles meets Draghi hurdle

Antonis Samaras’s ambition to drive Greece out of its rescue program is running into a roadblock.

The country’s prime minister might be thwarted by conditions for the European Central Bank’s asset-purchase program, as detailed by President Mario Draghi. Policy makers meeting in Naples on Thursday were resolute that Greece should stay under economic surveillance to be eligible, according to a euro-zone central-bank official involved in the negotiations. The official asked not to be named, as talks are private.

Draghi pledged to buy asset-backed securities and covered bonds for at least two years, and said that Greece and Cyprus must be subject to bailout programs to ensure their inclusion because their credit ratings are below investment grade. That creates a further hurdle for Samaras beyond convincing investors that the country is good for its debts.

“This statement, ‘no program, no purchases’ from Draghi, is a direct warning to Samaras against an early exit from the bailout” said Andreas Koutras, an investment manager at SteppenWolf Capital LLC. “Bottom line is that Greek banks should find more buyers for these securities, as the ECB won’t buy new issues on its own. Even though the ECB has lowered its standards, Greek banks won’t benefit as much.”

While the ECB wants Greece to remain under some form of surveillance, the country’s government may choose what kind of supervision that will be, the euro-zone central bank official said.

Increased Liquidity

The four largest Greek lenders held about $20 billion of covered bonds, according to Bloomberg data, representing almost 5 percent of the industry’s liabilities, Bloomberg Intelligence analysts Tomasz Noetzel and Kapilan Theiventhirampillai wrote in a note yesterday.

Citigroup Inc. said in a note that Greece’s banks and the debt-stricken country’s economy would benefit from ECB’s purchases. Liquidity in the Greek system would improve, which might lead to more lending for the economy, Citigroup said.

These potential benefits may not be realized if Greece exits its rescue program. Draghi said yesterday that he wants to be “as inclusive as possible, but with prudence” as he set out the caveat that the ECB will buy securities in countries with credit ratings below BBB- only if they are subject to bailout conditions.

Greek Finance Minister Gikas Hardouvelis said last month that Greece’s credit rating may be upgraded to BBB by mid-next year. According to Hardouvelis, Draghi would welcome a third bailout for Greece as this would make it easier for him to lend to Greek banks.

“But a third bailout is not necessary for Greek lenders to get ECB financing,” he said in a September 21 interview with local weekly To Vima.

Strings Attached

Economic surveillance is not the only string attached to Draghi’s pledge to channel liquidity into Greek and Cypriot banks. According to rulebooks released yesterday, Greek banks will have to provide increased collateral to the ECB for covered bond purchases. Also, the ECB will be buying up to 30 percent of asset-backed securities issued by Greek banks vis a vis 70 percent limit in other euro area countries.

“We view developments as positive for the liquidity of Greek banks and the economy but highlight that the short-term impact will be limited as haircuts applied are elevated and eligible assets limited,” Konstantinos Manolopoulos, head of research at Athens-based Investment Bank of Greece, wrote in a note to clients.

Draghi’s Effect

Greek 10-year bond yields fell 4 basis points to 6.431 percent as of 9:57 a.m. local time in Athens. Greek bonds have delivered the highest returns this year among all sovereign securities tracked by Bloomberg, as Draghi’s measures to revive the euro area’s economy have driven investors into higher yielding notes.

Emboldened by the country’s return to the bond market after a four-year exile, Samaras has said that Greece will not ask for a new bailout once the current euro-area backed program runs out in December. He also said Greece may forgo remaining disbursements from the International Monetary Fund in 2015 and 2016.

Draghi’s comments were “rather badly received by investors, following the government’s expressed intention to exit the current bailout program early,” Thanassis Drogossis, head of equities at Pantelakis Securities SA in Athens, wrote in a note to clients.

The bailout loans, which have kept Greece afloat since 2010, were attached to strict conditions of belt tightening that triggered a social backlash and exacerbated a recession that left more than a quarter of the workforce without a job.


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