Given the recent substantial increase in Greek political risk and the high probability of early elections I ‘d like to comment on a recurring theory that ECB can threaten to close down Greek banks access to liquidity (in the same manner it did in Cyprus) in case that a newly elected Syriza government does not adhere to the currently agreed upon measures, reforms and budget cuts.
In my view, 2015 is quite different than 2012 and the possible threats that the ECB could (then) make against Greece are no longer possible.
The main measure that the ECB can take against Greece in case that the current program is put on hold is to remove the waiver on accepting Greek government guaranteed securities and other assets as collateral in its regular refinancing operations. The important fact to keep in mind though is that Greek banks do not hold significant amounts of Greek government bonds on their balance sheets any more. They only have a little over €10bn of relevant securities of which almost €5bn are Treasury Bills. The collateral being used in ECB operations are mainly the EFSF notes that banks acquired from the Hellenic Financial Stability Fund (HFSF) when they were recapitalized after the PSI. The nominal value of these notes exceeds €37bn which coupled with other assets (such as credit claims) covers current ECB financing which stands close to €45bn.
Any additional financing requirements can be covered through ELA financing although this will necessarily result into much higher borrowing costs (since the ELA rate is more than 150bps higher than the ECB marginal lending rate). The threat of closing down ELA (as in Cyprus during 2013) is only possible if the Greek banks do not cover minimum capital requirements. Given that it’s only been a few weeks since the ECB stress test results were announced during which the central bank affirmed the strong capital position of Greek banking institutions it is not at all clear how the ECB would be able to justify not allowing or placing hard limits on ELA financing.
Moreover, even if negotiations between Greece and its creditors go south this cannot have any effect on the EFSF notes held by banks since any principal and interest payments on EFSF loans will be made after 2020 (interest payments have been deferred and capitalized until at least 2022). Coupon payments on PSI bonds (including bonds issued during 2014) stand around €1bn per year and do not create substantial problems. Unfortunately the EFSF loan does contain cross default clauses referring to the rest of Greek obligations so a future Greek government should proceed with caution although the Greek law covering ECB SMP bonds does provide some room to maneuver* .
Greek debt payments during 2015 mainly involve T-Bill rollovers and payments of €7bn towards the ECB (for SMP bonds) and €9bn towards the IMF:
ECB’s main leverage over Greece concerns whether liquidity will be provided through regular OMOs or ELA and if Greek bonds will be included in a possible future QE program. The latter will obviously allow a much more orderly access to capital markets for bond issuance, especially coupled with the presence of an EFSF ECCL program.
* When I first wrote the post I had in mind that ECB Greek bonds are covered by Greek law. It turns that the ‘default events’ on the EFSF financing agreement cover more or less all of Greek government liabilities.