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The ECB released its weekly statement for the week ending at 21 December 2012. Since on 21/12/2012 Greek government titles began to be accepted as collateral in ECB refinancing operations this week’s statement should provide for a closer look at the magnitude of the change in Greek banks borrowings.

Asset Side

Looking into the asset side ‘Other claims’ were lower by €20.7bn which should correspond to the reduction of the use of ELA by the Greek banking system. Since MROs happen in the middle of the week, Greek banks would only have access to the marginal lending facility which shows an increase of €13.61bn. The almost €7bn difference should most probably be attributed to the (cash) part of the December Greek disbursement which would be used for budget needs (the rest of the funds were in the form of EFSF notes and bills). Regular operations (MRO and LTRO) were lower by €4.9bn which should be attributed to the generally positive climate since the OMT announcement.

Liability Side

On the liability side banknotes in circulation show a very large increase of €11.91bn, probably of seasonal (Christmas) nature. Bank reserves are 11.62bn lower and liabilities to other euro area residents by €18.27bn, both in the case of ‘General Government’ and ‘Other liabilities’. Liabilities to non-euro area residents are €3.57bn higher which is a negative development.


The latest MRO (which should include any borrowing by Greek banks from the marginal lending facility being moved to the regular lower rated weekly operation) shows an increase of €17bn from €72.8bn to €89.66bn. In general, it seems that Greek banks managed to move a large part of their ELA borrowing to the ECB regular operations while also lowering their Target2 liabilities (with the help of the disbersement). Things will be much clearer when BoG releases its December balance sheet.

On a related note, the ECB also included the Greek collateral haircut list in its decision of 19 December. The haircuts are quite heavy (15% for T-Bills of up to 1 year maturities) but will still allow for much lower yields in the forthcoming T-Bill auctions which could move close to 1% (from over 4%). Such a development would make current T-Bills a high return investment. Remaining Greek bonds will face haircuts of 56-57% which should place a rather high floor on their yields.

Greek collateral haircuts

BoG recently released its November 2012 financial statement.


Regular refinancing operations were even lower in November, registering at €5.6bn (compared to €6.52bn during October). The fall is mainly attributed to lower MRO lending towards credit institutions. A large part of the fall reflected an increase in ELA which increased €0.5bn to a total of €123.3bn (more than 60% the projected 2012 GDP). Nevertheless, posted collateral (not including collateral covering regular operations) fell from €246.64bn to €245bn which should reflect higher prices in certain bank assets such as the post-PSI bonds.


Bank reserves increased during November from €1.77bn to €2.35bn (current accounts + deposit facility). This should be attributed to lower demand for banknotes which brought the 9.2 figure down to €15.04bn (from €15.49bn). The general government account was lower at €3.36bn (from €4.32bn in October) while Target2 liabilities were roughly unchanged at €108.46bn.

It seems that still only resident developments are having an impact on BoG balance sheet, with banknotes being the primary factor (after a large increase during the summer elections). Greece remains decoupled from the developments in the rest of the periphery where Target2 liabilities have fallen significantly due to a return of foreign capital.

The December bond buyback should have a large impact on the BoG balance sheet since banks will replace ELA financing (collateralized by Greek government bonds) with regular financing (collateralized by EFSF Bills). The ECB should also accept Greek government guaranteed securities in its operations again which should push ELA much lower and allow Greek banks to refinance at lower costs. A €1bn fall in ELA should provide an annual reduction of close to €20mn in financing costs. In the short-term, this reduction will be reflected in the remaining weekly ECB financial statements.

From a trading perspective, it is highly possible that future Greek T-Bill auctions will achieve lower rates.

The Greek PDMA released the final results for the Greek bonds buyback. The total principal offered was €31.9bn for which €11.29bn in EFSF 6-month Bills will be needed (compared to the originally anticipated €10bn amount) while the weighted average purchase price was 33.8%.  The Annex contains a breakdown per bond series:

Greek bond buyback results


My initial comments:

  1. The purchase price achieved for every bond series is equal to the maximum price allowed in the auction. So it seems that the size of the auction allowed bondholders (which were at least 40% foreign) to achieve the best price offered.
  2. In the case of short-term series (2023-2025) only 40% of the principal held was offered. This percentage increased to 50% for 2026/2027 and to 55% for the longer dated series. Bondholders decided to mainly exchange long-term bonds (which would probably become illiquid anyway after the buyback) and hold on to shorter term ones which provide for push-to-par mechanics.
  3. Total principal write-off will be close to €20.6bn. Since each series pays €987mn till 2023 and EFSF interest will be deferred for the next 10 years, Greece will manage to avoid paying interest for €20.6bn principal completely and another €11.3bn till 2023. That’s around€ 6.5bn (for €20.6bn) and €3.5bn (for €11.3bn) for a total close to €30bn. As a result, outright debt reduction will be close to €27bn till 2023 plus another €3.5bn in deferred interest payments.
  4. Since domestic institutions seem to have offered almost 100% of their holdings and pension funds hold €7.9bn it will be almost impossible to enable the bond CAC’s in the future, especially since they can only be enabled for all series simultaneously and they require a 66% majority. In other words, remaining holders are now much more secure.
  5. Greek banks seem to be the main losers. Although they ‘ve probably calculated fair value around 21-25 (which means they ‘re making a small profit right now), they will lose on future interest payments and amortized principal. Their future outlook is much worse since they don’t have GGB profits to look into. How the Cypriot banks participated remains to be seen.

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Kostas Kalevras

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