May 5, 2017 / 11:36 AM / 6 months ago

Greek bonds are the last of the ECB free rides

LONDON (Reuters Breakingviews) - Greek bonds are investors’ last chance to take a free ride courtesy of the European Central Bank. Athens could soon be eligible for the bank’s programme of bond purchases, pushing up prices just as those of other euro zone bonds start going the other way.

A protester kneels to pay his respect in front of a Greek flag during an anti-austerity rally in Athens, Greece in 2015

Greek 10-year bond yields have fallen over a percentage point to 6 percent since April as Athens reached a deal with creditors on reforms. That should unlock enough funds to pay back bonds due in July. The next boost will come if the European Central Bank decides Greek debt is good enough buy as part of its money-printing scheme. That in turn depends on the kind of restructuring Greece and its creditors agree.

The central bank may stop buying government bonds in a year or so, but it could still have an impact, because bonds are a fairly small share of total outstanding Greek debt. Eurobank reckons the ECB could buy perhaps a tenth of its privately-held securities in just a couple of months. Analysts are pencilling in a 1 percentage point fall in Greece’s yield spread over Germany when the ECB steps in. Lower bond yields should help banks borrow and boost the economy, making another bailout less likely.

The main obstacle is that the ECB probably won’t buy Greek bonds unless the IMF is happy that Greece is on the right track. And Europe and the IMF can’t agree how much debt relief Greece needs, through loan extensions and interest-rate grace periods. Germany wants concessions kept to a minimum ahead of its own elections. Creditors in Europe may also be wary of giving Greece too good a deal. If it’s too kind, and Greece’s economy does pick up, the left-wing Syriza government would at best take the credit – and at worst, may renege on agreed reforms.

For investors in Greek bonds, though, tough love from Europe may not be a disaster. Greece could need another bailout, but allowing it to default would hurt more important countries, like Italy, which are not yet in the clear themselves. Current yields of around 6 percent bake in an overly-pessimistic near-10 percent chance of a default. The ECB is just the icing on the cake.


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