Formula sought for continued ECB support

With the prospect of Greece joining the regular quantitative easing program (APP) not gaining traction, the European Central Bank is considering alternative ways to continue its support for the country after the end of the vast bond-buying scheme – the Pandemic Emergency Purchase Program (PEPP).

Both the ECB and the European Union are well aware how important it is to finance the Greek economy at a low cost, and how pivotal it is for its recovery in the post-bailout period.

Decisions are expected during a much anticipated meeting of the ECB Governing Council Wednesday and Thursday regarding the end date of the PEPP, most likely in March, according to estimates.

It will also decide on the fate of the Greek bonds that joined the PEPP, but not at investment grade, as required by ECB rules.

In view of the crucial decision in Frankfurt, most likely on Thursday, a possible scenario for Greece entails flexible reinvestments of PEPP bonds. 

According to this scenario, Greek bonds could be purchased throughout the duration of the PEPP reinvestment (which will last until the end of 2023), with a somewhat more favorable regime compared to the one that would apply with regular reinvestment.

According to sources, the program could have a “bias” in favor of Greek bonds, since Greece is excluded from the normal APP program.

Under this plan a very small percentage of reinvestments from other countries could be transferred to Greece. This is feasible, banking sources say, as Greece has relatively small volumes, compared to other countries.

Ideally for Greece would be for its bonds’ protection to be maintained at the same proportional level as that of other countries. But market sources have indicated this will also hinge on bond issues.

In any case, the most likely scenario is that Greek bonds will continue to be bought and used as collateral for financing the operations of Greek banks at least until the end of 2023.

The crucial question is whether these interventions will be enough to fully cover the markets and not put too much pressure on securities returns.

The ECB has bought Greek bonds worth almost 35 billion euros and, with its help, the yields on 10-year securities reached a record low of 0.53% in August. The yield Monday was at 1.33%.