The Greek central bank is planning an appeal for the country’s bonds to remain eligible for new European Central Bank purchases after March when the vast bond-buying scheme launched in response to the pandemic is expected to end.
Several members of the ECB’s governing council said they were amenable to finding a way to keep buying Greek bonds for the rest of next year when they meet on Thursday. But Greek officials fear legal hurdles may mean that ECB purchases of the country’s debt will still be reduced much more significantly than those of other countries.
Officials in Athens are keen to avoid the stigma of the country being singled out once again without the safety net of the ECB’s bond-buying after its €1.85tn Pandemic Emergency Purchase Programme (PEPP) is due to stop net purchases in just over three months’ time.
The ECB is usually barred from buying bonds issued by Greece because it is the only eurozone country rated below investment grade by the main credit rating agencies.
However, the central bank made an exception to its ban on buying so-called junk-rated bonds that allowed it to restart purchases of Greek debt when it launched the PEPP in March 2020.
The ECB has bought €35bn of Greek bonds over the past two years. When it stops net purchases under the PEPP, the central bank is expected to continue buying bonds under the longer-standing Asset Purchase Programme. But this scheme is barred from buying junk bonds.
Greece’s borrowing costs have fallen sharply since the ECB started purchasing its bonds. The country’s 10-year bond yield dropped from about 2.4 per cent when the PEPP started to a record low of just over 0.5 per cent in August. Bond yields fall as their prices rise.
The country’s bond yields have risen recently and investors expect their spread — the extra interest Athens has to pay relative to Germany when it sells new debt — to rise further if the ECB sharply reduces the amount of Greek debt it buys.
Mark Dowding, chief investment officer at BlueBay Asset Management, said this scenario “would definitely be a reason for Greece to underperform a bit. You could see spreads widening further.” But he said hopes of future Greek rating upgrades may limit the downside for its bonds.
Some ECB purchases of Greek bonds will still be possible using the proceeds of maturing bonds already bought under PEPP. The central bank has committed to continue those reinvestments “until at least the end of 2023” and they could be skewed in favour of Greece.
Frederik Ducrozet, strategist at Pictet Wealth Management, predicted PEPP reinvestments would total about €12.5bn a month.
Another option is for the ECB to launch a new bond-buying programme that has similar flexibility to the PEPP, although several council members said this was unlikely. The ECB and the Bank of Greece declined to comment.
Analysts and Greek officials do not expect the country’s bonds to earn an investment grade rating until after the next national elections scheduled in 2023, despite the strong rebound of its economy this year.
Greece has the largest national debt in the eurozone, amounting to more than 200 per cent of gross domestic product. Athens is still under a system of “enhanced surveillance” by the European Commission designed to ensure it meets deficit targets until next year.
A Greek official said the country hoped to avoid another “Deauville moment” — a reference to the French coastal town where the leaders of Germany and France shocked investors in 2010 by agreeing that any rescheduling of a eurozone country’s debt would include private sector creditors, triggering a sell-off in Greek bonds.
Greece was bailed out by the “troika” of the IMF, the ECB and the commission, which imposed strict austerity measures on Athens. ECB president Christine Lagarde, who was French finance minister during the Deauville meeting and later became head of the IMF, has since said “the demands vis-à-vis Greece were excessive” — indicating sympathy with the idea that the country was harshly singled out.
Officials are confident Greece’s finances will not be hampered even if its bond yields rise. The country’s Public Debt Management Agency usually front-loads bond issuance and next year it aims to raise about half of its €10bn debt programme in the first quarter, before the PEPP expires.
Greece has also built a cash buffer that now amounts to about €40bn, enough to cover financing needs for at least three years.
Additional reporting by Tommy Stubbington