Beware Of Greeks Bearing Collateral

The main story today is not that the ECB will no longer (as of February 11) accept Greek government bonds as collateral and that Greek banks can have access to the national central bank via the Emergency Lending Assistance. That news broke late in North America yesterday.  The euro fell around a cent on the news. The real development today is that the impact remains largely confined to Greece. As this became clear, and that the ECB would lift the ELA borrowing cap by 10 bln euros, the single currency recovered in the European morning.  It is above levels that were prevailing when the news initially broke. 

Following the election results, Syriza came out swinging. It first pressed for debt forgiveness and then offered a sketch of a bond swap scheme.  The IMF, EU and Germany did not like it. The ECB was the bludgeon. This was not a technocrat decision. It was a discretionary political decision.   It could have waited until closer to the end of the month and let elected officials work it out. Like the Hisenberg’s uncertainty principle, the mere fact of officially observing that it was not confident of a new agreement will be reached made that outcome more likely. 

Greek markets have been hit. Yields are sharply higher (10-year yield up around 60 bp  to 10.30% and three-year note yield is up 170 bp to 18.03%).  Greek stocks are off about 5.5%, led by financials, which are down around twice as much. European peripheral bond yields are 1-3 bp higher, and most markets in Europe are lower. 

It is interesting to note that Spain is performing a little worse than Italy. ECB’s shot across the bow was not meant only for Greece, but it is a signal to others who are thinking about breaking from the austerity regime. Don’t let the dispute between the ECB and Berlin over monetary policy confuse the issue. The ECB wants the national governments to do their part–structural reforms–and it is willing to do its part to boost inflation in line with its mandate–but it does not want to call into question the austerity regime.  In fact, Draghi has said that ordo-liberalism is part of the ECB’s DNA. Before the dispute over monetary policy, Draghi was affectionately called the Italian Prussian in a German magazine.