The relevance of the ECB for Greece

When European Central Bank President Mario Draghi held a scheduled news conference on Thursday, what Greece took away from his comments were words of caution regarding a trial bond issue and that inclusion in the quantitative easing program is not yet on the cards for Athens. The rest of the world, though, was tuning in to a different message.

As has often been the case over the last eight to nine years, Greece’s rather unique status means that the issues which concern local politicians, media and citizens are rather different to what our peers in the eurozone are interested in. We exist, to a large extent, in our own bubble and are often oblivious of matters that are broader (and often much more important) than the narrow confines of our existence under the international bailout.

Let’s start off, though, by examining what Draghi said about Greece. He was asked about the Greek government’s plans to conduct a trial bond issue and set out some concerns, which have been heard from other quarters, including Bank of Greece Governor Yannis Stournaras. Draghi stressed that any bond issue must be part of a wider strategy for sustainable market access and that borrowing from the markets should not lead to a let-up in reforms.

“The sound implementation of the program and credibility are essential, however, for restoring market confidence, and we have to take note that the national central bank has expressed some concern about that; although there has been serious progress in place in Greece throughout the last several months,” he told reporters in Frankfurt.

“The issuance activity should be part of an overall strategy where you have the completion of the third program and also a return to the market, but it should be in a lasting way,” added the head of the eurozone’s central bank.

His comments appear a polite suggestion that Athens should think carefully before it makes any final decision regarding when to begin the book-building process for the country’s first bond issue since 2014. The Greek government put its reported plans for a return to the markets last week on hold after deeming the conditions were not favorable enough. It remains to be seen what the coalition decides this week regarding market access amid speculation that some officials believe Greece could tap the markets successfully in the coming days.

The other question that Draghi answered in relation to Greece was about accepting the country’s bonds for the ECB’s QE program. He responded briefly, only to say that it is “premature” to discuss this issue. The central bank made its position clear following the June 15 Eurogroup, when it said that it needs further clarity about the measures that will be agreed to make Greece’s debt sustainable before it can consider extending QE to Athens.

This means that the bond-buying scheme will not appear relevant to Greece until the debt relief discussion becomes more detailed, which will certainly not be before national elections in Germany this September. However, it would be a mistake for Greeks to tune out at this point. What Draghi had to say in the rest of his press conference may not have been directly relevant to Greece right now but it was of great importance for the eurozone economy, markets, bond yields and, therefore, for Greek decisionmakers and citizens in the immediate future.

The issue the central banker was pressed hardest on by journalists was a speech that he had made in Sintra, Portugal, on June 27. Then he spoke of the possibility of “adjusting the parameters” of the ECB’s 60-billion-euros-per-month stimulus. This immediately prompted a negative reaction on the markets and caused a spike in bond yields, revealing the concern among investors about the tapering, or scaling back, of its bond buying.

Since launching the program in 2015, the ECB has generated around 2 trillion euros of extra liquidity by buying sovereign and corporate bonds, providing the eurozone’s flagging economy with its most significant period of growth since the crisis began and suppressing interest rates to make borrowing cheaper. Greece’s non-inclusion in the program meant that the economy in most need of this fillip missed out.

But the current discussion is very relevant for Greece because the decisions that will be taken in the coming months will greatly shape the environment in which Athens will be issuing bonds and the potential for the Greek economy to recover. Nervous markets will not be ideal for a Greek government looking for the lowest bond yields possible, while a eurozone economy that is unable to maintain the momentum of recent months when the ECB’s stimulus is withdrawn could hamper Greece’s hopes for more trade and investment as it strives towards the finishing line of its adjustment program in August 2018, and beyond.

Draghi tried to assuage concerns when responding to journalists’ questions on Thursday, banishing talk of when the QE program would be wound down and stressing that it might even be stepped up, if necessary.

“Now, the last thing that the [ECB] governing council may want is actually an unwanted tightening of the financing conditions that either slows down this process [of rises in prices and wages to follow the economic recovery] or may even jeopardize it; and that’s why we retain the second bias, or let’s call it, reaction function,” he said, adding that the central bank has not yet seen the level of inflation it would like and this means that it does not want to put a precise date on when the discussion to start easing the stimulus should take place.

Nevertheless, the immediate reaction from the markets suggested that investors have begun to ponder the beginning of the end for QE. Indeed, it is an inescapable fact that the ECB governing council will have to discuss the prospect soon. Reuters reported on Friday that ECB policymakers believe October is the most likely time that the central bank will take a decision on the future of its asset buys. Greece will have to break with past practice and follow the discussion and its outcome. Although it may seem like a world removed now, the decisions taken will affect Greeks in one way or another.