ECB preparing to restore waiver, depending on pension reform

The European Central Bank is planning to reintroduce the waiver to the rule preventing Greek banks from tapping cheap liquidity from Frankfurt using Greek bonds as collateral. The ECB is expected to make its move once Athens has passed the social security reform through Parliament.

Banking sources say that ECB President Mario Draghi has informed the Greek side that the pension reform vote will constitute strong progress toward the successful completion of the first bailout review, thereby allowing the Eurosystem to reinstate the waiver of the rule that forbids the use of low-rated bonds as collateral for liquidity.

Sources from the local credit sector say that restoring the waiver will have a major psychological impact, representing a huge step toward the return of the country and its banking system to normality.

In financial terms the impact will be rather limited, with only a small part of the liquidity drawn through the emergency liquidity assistance (ELA) mechanism reverting to the normal liquidity supply of the ECB. This will in turn lead to an improvement in the cost of funding for banks, as ELA comes with an interest rate of 1.55 percent, while the basic funding by the ECB has an interest rate of just 0.05 percent. It may also lead to a drop in Greek bond yields.

In a letter to two SYRIZA members of the European Parliament, Draghi stressed that restoring the waiver and the smooth progress of the bailout program’s reviews are the main conditions for the inclusion of Greece in the quantitative easing (QE) program.

“Adherence to the new fiscal adjustment program and its ownership constitute vital conditions for strengthening the confidence of depositors and market investors in the Greek credit system, and therefore the generation of positive consequences to liquidity conditions for Greek economy,” said Draghi in his letter in response to a question by MEPs Dimitris Papadimoulis and Stelios Kouloglou.