Greece: Between Tsipras, The ECB and a Hard Place

February 4, 2015 0 Comments

I haven’t had much time to write about this one, but most people are already aware of the economic and fiscal problems the nation of Greece has been having for years. Its unsustainable level of debt (more than 170% of GDP) and a lackluster economy that makes Americans pretty fortunate to have the problems they are having right about now.

Most people already know about the recent elections that has occurred in Greece as well. The Syriza party has gained lots of popularity, vowing to replace the austerity measures imposed  by the ECB and renegotiate their debts. While this may sound good, for a country that has suffered through budget cuts and higher taxes, it may end up doing more harm than good. Most people feel that the stand off between the newly elected Greek government and the European Central Bank will lead to Greece ultimately leaving the Euro Zone, also what it known as the ‘Grexit.’

Why is this important? The ECB Quantitative Easing program involves major bond purchases of the national central banks in the region. This means that there would be a slew of losses that would incur if Greece were to leave the Euro. These losses would be further compounded by stalling potential economic growth. Greece exiting the Euro limits the ECB’s ability to spur lending to their respective countries.

Much recently, as if things couldn’t possibly get any worse, the ECB recently put out a statement that it would lift the waiver on Greek government debt as collateral. It also noted that banking liquidity must be met by the Greek Central Bank.

From today’s ECB press release:

This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of Eurosystem counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing Eurosystem rules.

The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).

So the Greek Central Bank has about one week before the key liquidity support for their financial system ends. Also, if the ECB is not accepting Greek bonds as collateral for loans, then other forms of collateral needs to be found. The problem is that this might not be available for the Greek Central Bank. The only thing Greek banks see to own are Greek government debt.

So what has happened as a result? Well, the Euro is trading at new lows and this has triggered a massive sell-off in the Global X Fund Greece 20, which tracks and reflects the performance of twenty of the largest securities listed in the Athens Stock Exchange (ASE).

Global X Fund Greece 20

It isn’t clear how the Syriza party is going to handle this. They’ve promised sweeping economic reforms, but their lack of experience in the government suggest that they might have a difficult time dealing with the gravity of their situation. Then again, being a socialist means never having to actually understand economics or modern finance.

Perhaps they can take lessons from the Chinese Government…

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