European Central Bank to Accept Greek Bonds as Collateral



ecbThe European Central Bank has once again agreed to accept Greek bonds as collateral for loans in order to aid the country’s struggling banks, says a Financial Times report.

The move comes after Wednesday’s agreement between Greece and creditors that would allow the next tranche of the country’s bailout loan and the agreement — in principle — to ease the country’s substantial debt. Next week, the ECB will start accepting Greek state bonds to boost the banking system.

According to the Financial Times, the ECB’s governing council, made up of six of the institution’s top officials and heads of national central banks in the euro zone, will meet next Thursday in Vienna. Greek officials were confident that the ECB would decide at that meeting to allow Greek lenders to use Greek sovereign debt as collateral to access central bank cash.

Last summer, ECB Vice President Vítor Constâncio said the board would reinstate the cash lifeline once it was satisfied there was “credible implementation” of the bailout program — a hurdle Athens is now expected to clear.

The report says that the ECB suspended the waiver which made Greek government debt eligible for the central bank’s auctions despite its junk rating with major credit rating agencies — in February 2015. Since then, Greek banks stayed afloat by emergency loans made by the Bank of Greece.

If the ECB board votes in favor of reinstating the waiver, Greek banks will be able to access the central bank’s cheaper loans instead of the more expensive emergency loans, known as Emergency Liquidity Assistance, offered by Greece’s central bank. Limits to emergency loans, which the Bank of Greece can grant only at the behest of the ECB, led Greece to introduce capital controls in late June 2015.

The reintroduction of the waiver would not, however, allow the Greek government to benefit immediately from the ECB buying program, known as quantitative easing.

Under QE scheme, the ECB buys 80 billion euros worth of mostly government bonds each month. While the purchases are aimed primarily at reviving inflation and growth, euro zone governments also benefit because of the impact QE has on lowering their borrowing costs.

However, there are limits the ECB sets for the amount of government debt any particular country can hold under the QE plan. Greece exceeds these limits because of purchases of its bonds made under earlier emergency programs.

While Greece would go under those limits by making repayments to the ECB in late July, the governing council would also need to undertake a sustainability analysis of Greece’s debt. New QE purchases are also subject to blackout periods between the conclusion of reviews by institutions monitoring Greece’s bailout program, the Financial Times report concludes.