Bond protection expansion

Bond protection expansion

The European Central Bank will acquire additional Greek bonds totaling at least 10 billion euros if – as is widely expected – it announces the expansion of its Pandemic Emergency Purchase Program (PEPP).

This is based on a conservative estimate of an overall €500 billion expansion, taking the sum of the emergency bond-buying program to €1.85 trillion, from €1.35 trillion to date. If the program is expanded even further, with Société Générale expecting a €750 billion expansion, then Greek bond sales will reach up to €15 billion.

This new support to the Greek economy by Frankfurt will be added to €27 billion of Greek bonds (€24 billion in nominal prices) which it will acquire anyway up until June 2021, when PEPP is scheduled to end as things currently stand. Since March 18, when the program was activated, the ECB has acquired Greek bonds worth €14 billion and this will reach up to €15 billion up to year-end, topping all Greek market forays this year (which added up to €12 billion).

Besides the increase in the size of PEPP, the market expects it to be extended until March 2022. This is particularly important for Greece, which has yet to return to investment grade, as it means that the biggest buyer of Greek debt will stick around for longer, covering virtually the entire period until the completion of the country’s post-bailout surveillance period, in 2022.

Given that after the end of PEPP there will also be the re-investment period, if the scenario that sees Greece climbing back to investment grade in 2023 proves correct, Greek bonds will remain protected from all market turbulence throughout that period.

The Greek bond rally, which is all the more more impressive thanks to the ECB, and despite the good news on the coronavirus vaccine that under different conditions would have seen yields rise, points to the likelihood of a new market foray in the not-too-distant future. Still, the country’s cash reserves do not make such a move necessary.

The Greek cash buffer has grown to €39.5 billion after the arrival of €2 billion on Thursday from the European Union’s SURE program.

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