Greek QE eligibility? We’re not there yet

Greece: There's always the next parliamentary seasonGreece: There's always the next parliamentary season

Draghi confirmed that the ECB insisted during the last Eurogroup on August 14 that any bail-in of Greek depositors should be ruled out. He stressed that such measure was deemed by the ECB as counterproductive for the economic recovery as well as harmful for the Greek economy.

However, Draghi noted that similar considerations were not deemed applicable for senior debt holders, meaning that the ECB agrees with the Eurogroup decision regarding the application of the bail-in instrument for those investors.

The Greek bank recapitalisation process is officially due to be completed before the end of 2015, when the Bank Recovery and Resolution Directive (BRRD), including a bail-in of uninsured deposits, becomes effective.

Waiver

The second key takeaway from Draghi’s comments relates to reinstating the waiver for ECB funding. Such a development would require Greece to be in a financial assistance programme, to comply with it and show “strong ownership” as well as consistent and significant implementation.

Greece has been in a new programme since mid-August so the key question going forward involves the milestones that will be judged and assessed by the ECB in the coming weeks. The outcome of this assessment will decide whether the governing council will reinstate the Greek waiver.

This potential positive development though will only affect a small part of the collateral Greek banks currently use for Emergency Liquidity Assistance (ELA) funding. The collateral types that would be affected include state-guaranteed banks (pillar III) bonds of 8 billion euros, GGBs of around 5 billion and T-Bills of 3.5 billion.

The total amount stands at 16.5 billion euros (face value), while the potential positive impact on liquidity (i.e. shifting from ELA to the cheaper ECB funding) stands at around 8 billion. In contrast, pillar II bonds with a nominal value of 50.6 billion at the end of June, which make up the biggest portion of ELA funding, would be unaffected as set out in a relevant ECB decision on March 22, 2013.

QE

The next key takeaway from Draghi’s press conference involves Greece’s QE eligibility. Once a waiver is in place, Draghi said that three additional conditions should be met.

The first is that “during reviews in the context of financial assistance programmes for a euro area Member State, eligibility would be suspended and would resume only in the event of a positive outcome of the review.”

The first review of the third bailout, which was initially scheduled for the beginning of October, may reportedly be delayed until the end of November due to the snap elections on September 20 and the consequent delays in the implementation of the programme.

The second condition notes that the ECB will not buy more than 33 percent of the issuer’s debt and 33 percent of each specific bond issue (upward revised on September 3 from the initial 25 percent) to prevent getting a blocking stake under collective action clauses.

Draghi also revealed – for the first time – another condition: The ECB governing council will have to carry out a Greek debt sustainability analysis (DSA). This adds a new hurdle Greece has to overcome to become QE eligible.

Issuer limit

On the issuer limit, Draghi said upon the announcement of the Public Sector Purchase Programme (PSPP) on January 22 that even if all other conditions are in place GGBs could be bought as of July 2015.

On that date, the ECB and the National Central Banks (NCBs), via the Securities Markets Programme (SMP) and the Agreement on Net Financial Assets (ANFA) respectively, held a total of 27.18 billion euros in Greek bonds, corresponding to more than 40 percent of total. Of this amount, 19.87 billion relate to ECB holdings and 7.31 billion to NCBs.

However, a maturity restriction is also in place. This means that the Eurosystem will only buy securities which, at the time of purchase, have a minimum remaining maturity of 2 years and a maximum of less than 31 years. This maturity range is applied on a rolling basis.

Following the July and August redemptions of 6.68 billion euros in GGBs held by the ECB, the Eurosystem holds GGBs of 20.48 billion. This corresponds to 34.3 percent of the outstanding amount, which was reduced accordingly to 59.72 billion.

However, if we apply the maturity restriction, 12.84 billion euros in GGBs held by the ECB and NCBs (out of a total amount of 47.75 billion) fall within the eligibility perimeter. This fulfils the issuer limit condition since the respective ratio drops to 26.9 percent.

The main difference stems from the exclusion of 7.64 billion GGBs held by the Eurosystem (that mature in 2016 and 2017) from the numerator and an additional amount of 4.33 billion of GGBs held outside the Eurosystem from the denominator.

Based on these assumptions and calculations, we estimate that the maximum amount of GGBs that the ECB could purchase up to the 33 percent threshold, if all other conditions are met, currently stands at 2.9 billion euros. This amount corresponds to 7.4 percent of the current outstanding marketable GGBs of 39.24 billion.

It appears, therefore, that the issuer limit is the only one of the four key conditions that Greece currently meets. The reinstating of the waiver, successful completion of the first review and debt sustainability are the key obstacles to Greece being eligible for the QE programme, at least in the short-term.

*Manos Giakoumis is the head analyst at MacroPolis. You can follow him on Twitter:@ManosGiakoumis.