What do Lagarde’s decisions mean for Greece?

By Tasos Dasopoulos

The ECB secured the strengthening of the positive scenario for the Greek economy with its decisions on Thursday, ensuring the good course of the Greek issues and the flow of liquidity to the banks.

To date, the ECB has bought from the secondary market Greek bonds worth about 35 billion euros, ie about 37.5% of marketable bonds, significantly helping the decline in yields and high demand for Greek securities.

On Thursday, the ECB monetary policy council, having no other solution for Greece, proceeded with the decision that it wants after the end of the PEPP the program to continue for Greece “camouflaged” in the reinvestment obligation, which was extended until 2024.

How is this going to be done; Let’s say that in a period of time, in June 2022, when the PEPP will be completed, it has in its portfolio Greek securities that expire worth 4 billion euros. As long as the extraordinary bond buying program lasted, it would have to buy securities of equal value from the secondary market. After the end of the PEPP with the decisions taken in the last monetary policy council, it will be able to invest indiscriminately in Greek securities up to 3 billion euros. The remaining 1 billion euros will be invested either in a period that is facing a problem, or a new Greek debt that will be auctioned by ODDIH, indirectly maintaining a part of PEPP.

It is clear that new debt markets after March will be smaller. However, they will be aimed at keeping the yield curve steadily declining until Greece acquires the coveted investment grade. In practice, the difference in the securities markets will not be seen as the Greek market still has a small “depth” while the publishing activity of ODDIH (in 2022 is expected to range from 10 to 12 billion euros) is relatively limited due to low financing needs. of its debt and high cash. The main thing is that the ECB will be present to smooth over any “nervous” movements in the Greek bond markets.

Next move the banks

The next move of the ECB is expected to be the extension of the exemption to the acceptance of Greek bonds as guarantees for the financing of their activities, something very useful in the implementation of HERACLES I and II but also in terms of increasing their profit from its repositioning. liquidity to be acquired in TLTRO. It is recalled that the ECB due to the pandemic and in the direction of enhancing profitability for all European banks due to the pandemic imposed in March 2020 a negative interest rate of 1% on banks lending from targeted operations to longer-term refinancing, but allows any TLTRO loan bank with an interest rate of -0.5% so that each bank can benefit. Although this profit will last until June, it is not considered negligible.

High liquidity in banks is absolutely necessary in a year like 2022 in which they will be called to play a leading role by financing small and large investments.

The positive momentum is maintained

Apart from the financial benefits of the choice made by the ECB, there is also the symbolic one. The positive narrative of the course of the economy was in danger of being overturned if there was no smooth transition after the end of the PEPP.

The suspension of the ECB’s support with the special weight it has as the custodian of the common European currency despite the positive comments it has been receiving for a long time from its partners in the EU. and the European Commission, would signal to the markets that “something is wrong with Greece”.

With the vote of confidence given on Thursday by the President of the ECB, Mrs. Christine Lagarde, any doubts about the future of Greece outside the PEPP have recently been dispelled. Now the positive scenario for the course of the economy will prevail in 2022 despite the double uncertainty created by the continuation of the pandemic and the threat of the continuation of high inflation.