Greece could still benefit from QE
Several analysts believe a new bond-buying program is likely, but a key condition for Greece to enter it is to have its bonds upgraded to investment level by at least one major credit rating agency.
According to Bank of Greece estimates, the country’s participation in the QE program would reduce the yields of Greek bonds by at least 70 basis points. It would also drastically reduce the cost of borrowing for banks and businesses. However, even if the program is not resumed, Greece also has another opportunity: participation in the ECB reinvestment program.
BoG Governor Yannis Stournaras told Kathimerini that “the market today treats Greek bonds as if they are already at investment grade, showing it takes a Greek upgrade for granted.”
He estimates that “even without another QE, Greece could take part in a QE reinvestment phase.” He explains that “since Greece has never participated in the QE, there is accumulated requirement in capital key distribution [i.e. each central bank’s participation in the ECB capital], which means this country may enter the reinvestment stage.” It is that capital key which is used for the ECB to buy state bonds and reinvest them.
Fabio Balboni, senior European economist at HSBC, tells Kathimerini Greece’s participation in the ECB’s reinvestment process is possible: “We do not expect the ECB to restart QE unless the situation deteriorates from now. But in any case restarting QE is a second-order issue for Greece. When (and if) Greek government bonds get to investment grade, the ECB could start buying them to fill Greece’s capital key during the reinvestment phase of the previous QE program, without the need to restart QE. We think that this is a decision which is totally in the hands of the ECB to make, even within existing rules.”
“Based on what rating agencies have said, broadly speaking there are three things which are pre-empting further upgrades: political uncertainty, situation of the banks, and risk of fiscal slippage. After the elections, we could have more clarity on all these issues, which could unlock one (or more) rating upgrades. Becoming investment grade would not only matter for QE, but even more importantly would broaden Greece’s investor base allowing more investors to buy Greek bonds,” argues Balboni.
Danske Bank Chief Analyst Jens Peter Sorensen expects an upgrade by up to two notches for Greece, that would bring the country one step before investment grade: “The comments from Draghi were very positive for Greece, even though it may take some time before Greece reaches investment-grade level. However, there is a strong hunt for yield and combined with a Greece being funded for almost 10 years – then the easing of monetary policy as well as the positive economic story is very supportive for Greece.”
“I do expect an upgrade of Greece given the significant decline in the funding – and it could be two notches this year. I am a bit surprised that they are getting closer to an IG rating , but the rating agencies are slow and most of them just have two rating reviews during the year,” says the Danske Bank analyst to Kathimerini.