February 5, 2015 / 11:45 AM / 3 years ago

Brief respite over for Greek bank bonds

LONDON, Feb 5 (IFR) - The brief respite for Greek bank bonds is over as markets digest the news that the ECB will no longer accept Greek government bonds as collateral, forcing lenders to seek more expensive emergency funds.

Greek bank paper had clawed back some of January’s dramatic widening in the first half of this week, but yields have climbed again this morning. The bid on Alpha ’s 3.375% June 2017s passed 19%, up from 17%, while Piraeus ’ 5% March 2014s were pushing 23%, up from 21%.

The ECB’s decision to lift its waiver will make the banks switch collateral from sovereign bonds and government-guaranteed bonds to non-government credit claims and, crucially, rely more heavily on Emergency Liquidity Assistance (ELA) from the Bank of Greece.

Reuters reported on Tuesday that three of Greece’s four major banks had already started to tap emergency funding from the Greek central bank as some depositors had withdrawn their money due to the political uncertainty.

Funding from the ELA not only has the potential to be capped but is also more costly, at 1.55% as opposed to 0.05%.

“We interpret this decision by the ECB’s Governing Council to force Greek banks to more expensive funding (via ELA) as a ‘nudge’ to the Greek government to speed up negotiations with the EU and announce soon an agreement on a programme,” Barclays analysts wrote in a note.

The move also effectively grants the ECB power to turn off the provision of liquidity to Greek banks.

“Needless to say, this is a crucial decision, which would only be taken if there are no prospects for an agreement on a programme. We believe that such a decision will be taken in consultation with the key European stakeholders, including heads of state, as it would in all likelihood precipitate a Greek exit,” the note continued.

Greece’s finance ministry said on Thursday that the country’s banking system was fully shielded through its access to emergency liquidity assistance available from the domestic central bank.

According to BNP Paribas estimates, Greek banks have EUR38bn of EFSF bonds and around EUR50bn of non-government credit claims eligible for ELA funding.

It added that the Greek banks’ current use of Eurosystem funding has sharply increased from EUR45bn in December to more than EUR80bn, mobilising the EFSF bonds (EUR38bn), sovereign bonds like GGBs/T-bills (around EUR10bn) and government-guaranteed bank bonds (EUR40bn).

European credit markets kicked off with some stiff widening this morning. The iTraxx Main index opened 1.75bp wider at 58bp, the Senior Financials 2.25bp wider at 65bp and the Sub Financials 7bp wider at 142bp.

“The impact on sub financials and high-yield is likely to be greater, and secondary liquidity is likely to be tested today,” BNP said.

Greek officials are continuing their meetings with various European policy-makers. Today’s meeting between the Greek and German finance ministers, Varoufakis and Schaeuble, will be crucial, since the post-meeting comments will show how far the two sides are from an agreement, Lloyds wrote in a note. (Reporting By Alice Gledhill; Editing by Philip Wright, Julian Baker)

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