ECB starts buying EFSF-issued bonds held by Greek banks, offering capital gains

The European Central Bank has implemented the first European Financial Stability Facility (EFSF) bond acquisitions from Greek banks, in accordance with a decision by the Eurosystem to that effect. Bank sources noted that the purchases concern bonds with a total value of 2.5 billion euros maturing in 2018, while the purchase price was just over 101 percent, allowing banks to reap small capital gains.

In total, Frankfurt has planned to buy EFSF-issued bonds worth 18.5 billion euros out of a total of 37 billion that the local banks possess.

Bank officials point out that when such purchases expand also to bonds of later maturity, then the prices will be higher, thereby offering Greek lenders greater capital gains. They estimate that the total benefit from the transactions and the parallel price rise of the bonds that will not be purchased by the ECB will range between 650 and 900 million euros for the country’s banking system.

Besides the capital benefit, the ECB move also has a huge symbolic significance, as it comes at a crucial time when the bailout review has not yet been completed and uncertainty remains dominant.

Although the ECB decision generated enthusiasm, leading to a jump in Greek bank stock prices, it does not signify any spectacular change in Frankfurt’s policy. The purchases exclusively concern EFSF bonds that have an exceptionally high credit rating and are almost equivalent to cash. Therefore, the purchases do not concern a market that involves any Greek risk. It is when the ECB starts purchasing and accepting Greek bonds as collateral that a difference will be marked, but that can only happen after the review is completed.