Date
17 August 2017
Yanis Varoufakis, the new finance minister of Greece, says it cannot be business as usual in his country as Athens tries to rewrite the terms of a 240 billion euro bailout. Photo: Bloomberg
Yanis Varoufakis, the new finance minister of Greece, says it cannot be business as usual in his country as Athens tries to rewrite the terms of a 240 billion euro bailout. Photo: Bloomberg

ECB blocks Greek junk bond as loan collateral

The European Central Bank will no longer accept junk-rated Greek government debt as collateral for regular central bank loans amid attempts by the new government to rewrite the terms of a 240 billion euro (US$272 billion) bailout.

The far-left government in Athens is under pressure to agree with international creditors over the country’s bailout program, fanning fears the gap between Greece and other European countries may be too wide to overcome, the Wall Street Journal reported Thursday.

“It is currently not possible to assume a successful conclusion of the program review” for Greece, the ECB said in a statement.

Krishna Guha, vice chairman of Evercore ISI, said the ECB move is  “consistent with our expectation that the ECB will take a hard line on Greece”.

The euro fell and gold rose after the ECB statement. The common currency traded at US$1.1338, from US$1.1424 earlier. Gold for April delivery, the most active contract, was recently at US$1,271 an ounce, from US$1,264.50.

Greek government bonds are rated junk, below the ECB’s minimum threshold, so domestic banks have been relying on a waiver to post collateral for cheap ECB financing through the central bank’s regular facilities, a critical lifeline for a banking sector battered by years of recession.

Greek banks will still have access to funds through the ECB’s emergency lending program. Under that facility, the credit risk of the loans stays on the books of the Greek central bank, and the loans carry a higher interest rate.

The ECB announcement was a rebuke to the new government installed last month in Greece, where the eurozone debt crisis erupted five years ago.

On Wednesday morning, the new finance minister, Yanis Varoufakis, met with ECB president Mario Draghi at the central bank’s Frankfurt headquarters.

Varoufakis later said they had a “fruitful” discussion and that he told Draghi the Greek government had “unwavering determination that it can’t possibly be business as usual in Greece”.

Draghi “clarified the ECB’s institutional mandate and urged the new government to engage constructively and speedily with the Eurogroup to ensure continued financial stability,” trhe report said, citing a person familiar with the discussions.

The ECB first waived the collateral requirements for Greek public debt in May 2010 at the height of the country’s debt crisis.

The waiver was suspended twice in 2012, the first time during negotiations between Greece and private bondholders over a debt restructuring and the second time amid concerns that Greece was not honoring its bailout commitments.

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