Draghi’s QE promise to Greece depends on debt-market math

Greece’s inclusion in the European Central Bank’s bond-buying plan this year doesn’t just depend on its new government sticking to a bailout program. It also relies on some debt-market arithmetic.

When ECB President Mario Draghi presented his quantitative- easing program on Jan. 22 in Frankfurt, he offered Greece the prospect of eligibility as existing securities roll off in the middle of the year. Those redemptions, he said, would bring the Mediterranean nation back below the ECB’s cap at 33 percent of an issuer’s debt, which the central bank imposed as Draghi presented initial guidelines.

Even after debt matures in July and August, the institution’s share of Greek bonds won’t drop below 33 percent for the whole of 2015, assuming no new securities are issued, according to calculations based on data compiled by Bloomberg.

It takes the inclusion of treasury bills to bring the ECB’s holdings below the cap. It currently owns just under 33 percent of the entire Greek debt market, and that would fall further, creating room for QE purchases, once the 2015 bonds owned by the ECB mature. That calculation is based on the supply of bills, or short-term money-market securities, remaining constant.

The ECB has yet to say precisely what will be included in its calculations on the allowance for its purchases and an ECB spokesman declined to comment on the calculations.

The ECB and euro-area central banks currently own about 27 billion euros ($30.4 billion) of Greek bonds, according to data compiled by Bloomberg, comprising 40 percent of the total outstanding market of about 67.5 billion euros.

General Election

At the end of this year, by which time 6.6 billion euros of bonds held by the ECB and in euro-area central banks’ investment portfolios under the Securities Markets Program are due to have been repaid, it would own 20.4 billion euros out of a total 60.5 billion euros. That equates to about 34 percent, still exceeding the limit set by Draghi. If the stock of bills remain the same and are included in the calculation, the ECB’s holdings would drop to 30 percent by the end of July and 27 percent by the end of the year.

Greek voters go to the polls on Jan. 25 in a general election that may shift power from Prime Minister Antonis Samaras to his anti-austerity opponent. Alexis Tsipras, who leads the opposition Syriza group, has vowed to abandon the budget constraints that underpin the ECB’s support, while keeping Greece in the currency union. Both Syriza and Samaras’s New Democracy party welcomed the QE decision.

Within Limits

Greece’s three-year note yield was at 10.08 percent at the 5 p.m. London close on Friday. It was issued via banks in July at an average yield of 3.5 percent. The 10-year yield was at 8.41 percent.

“There are obviously some conditions before we can buy Greek bonds,” Draghi said Jan. 22 in Frankfurt. “There is a waiver that has to remain in place, has to be a program. And then there is this 33 percent issuer limit, which means that, if all the other conditions are in place, we could buy bonds in, I believe, July, because by then there will be some large redemptions of SMP bonds and therefore we would be within the limit.”

The ECB will buy 60 billion euros of public and private securities a month, starting in March, Draghi said, adding that the central bank will buy bonds due between two- and 30-years. About 45 billion euros probably would be sovereign debt, according to a central bank official.

ECB buying will be carried out in proportion to each euro- area country’s contribution to the central bank’s capital, Draghi said. Adjusted for non-euro-region central banks, that works out as a 2.9 percent share for Greece, according to calculations based on data on the ECB’s website, equating to a pace of about 1.3 billion euros a month, if all other conditions are met.