Bloomberg — The European Central Bank will not consider including Greek government bonds in its asset purchases program before a pending bailout review is concluded and creditors agree how to ease the country’s burden, Mario Draghi said.
“First, let’s have an agreement, a full agreement, and let’s find measures that will make the debt sustainable through time,” the ECB president told lawmakers on Monday at the European Parliament in Brussels. “We regret that a clear definition of the debt measures was not reached in the last Eurogroup.”
“It is absolutely clear that our big ask is to be able to access the markets,” Greek Finance Minister Euclid Tsakalotos told reporters in Athens Monday. Greece’s inclusion in the central bank’s QE is a “difficult issue,” according to Tsakalotos as “the ECB, as our Lord, works in mysterious ways.”
Quantitative easing is a monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply in an effort to promote increased lending and liquidity. When the economy stalls and the central bank wants to encourage economic growth, it buys government bonds. Greece is a prime example of an economy that would benefit from QE. It appears that the ECB took a political decision, to create conditions that excluded Greece.
Greece and Cyprus are the only euro-area countries not eligible to benefit from the ECB’s asset-purchases program as their debt is rated below investment grade. A waiver applies for countries under the auspices of a bailout, on the condition that they comply with the conditions attached to their bailouts and their debt is sustainable.
“Greece’s inclusion in the ECB’s QE program would yield a major boost in terms of confidence and send a positive signal to investors,” Wolfango Piccoli, an analyst at Teneo Intelligence in London, said in an email. “QE is equally salient, if not more, on the political front as it would provide PM Tsipras with a much-needed ‘victory’ on the domestic front.”
German economy finds new fuel as it reaps benefits of Draghi’s QE. Germany’s gain comes from being a relatively strong economy locked into a currency union with weaker partners. European Central Bank’s euro 1.1-trillion stimulus programme that sent borrowing costs and the euro plunging, to the benefit of German exporters.
German debt is Europe’s benchmark, and it is bought in a greater proportion than securities from the other euro nations included in the QE program, under current rules.
After creditors reach an agreement on easing repayment terms for the country’s bailout loans, the Governing Council of the ECB will need to carry out its own analysis “in full independence,” which must show “that debt is sustainable also in adverse scenarios,” Draghi said. Any potential purchases would also be based “on risk management considerations,” he said.
Quantitative easing attempts to improve the national economy through three different channels: lowering long-term interest rates to improve investment conditions and disincentivise savings (interest rate channel); purchasing relatively safe long-term assets thereby driving investors into riskier investments (portfolio rebalancing channel); and weakening the exchange rate (exchange rate channel).
Euro-area finance ministers will attempt to reach a breakthrough on June 15, when they next meet in Luxembourg to discuss Greece’s bailout review and additional debt relief measures.
“European institutions should have their own strategy and their own opinions and I don’t think it’s correct for them to hide in opinions and analysis of others,” Tsakalotos said, adding that the time has come for the IMF to decide whether it remains on board regarding Greece’s program.
