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GUE/NGL Parliamentary Group
European Parliament
14 January 2016
ECB involvement in crisis management
in Greece
Marica Frangakis
Member of SYRIZA Pol. Secretariat
Outline
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Where it all began – Steep increase in GG bond spreads
The first Adjustment Programme, May 2010
The role of the ECB in 2010
The second Adjustment Programme, March 2012
The role of the ECB in 2012 - ‘preferred creditor status’
More ECB ‘unconventional measures’: OMT (2012-2014);
negative interest rates (2014-2015); QE (2015-2017)
Political realignments in Greece – the rise to power of
SYRIZA
The negotiations marathon
The third Adjustment Programme, August 2015
The role of the ECB in 2015 – guardian of stability or enforcer
of the creditors?
Where we stand now – What role for the ECB?
Where it all began: 10-Year government bond
spreads between Greece and Germany
The first Adjustment Programme, May 2010
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Loan of €110 billion, of which €80 bn intergovernmental
loans by the eurozone countries & €30 bn by the IMF;
Until February 2012, €73bn disbursed. Of this, approx.
64% used to repay bonds and loans that matured between
May 2010 - December 2011 & to support the Greek
banking system through the HFSF
3.5% interest rate; maturities of 15-30 years; grace period
of 10 years; seniority status (“the Borrower undertakes not to
grant to any other creditor or hoder of its sovereign debt any priority
over the Lenders”)
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Strictly conditional on implementation of severe austerity
measures; Disbursement to be made in 13 tranches
following review of fiscal developments of programme
implementation
The role of the ECB in 2010
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ECB joins the Troika (Eur. Commission & IMF) - “The GC of
the ECB welcomes the economic and financial adjustment
programme which was approved today by the Greek
government following the successful conclusion of the
negotiations with the EC, in liaison with the ECB and the IMF”
(Press Release, 2/5/2010)
Securities Market Programme announced on 10/5/2010 –
Purchases of government bonds in secondary markets to
contain pressures from sovereign debt risk on banks, followed
by sterilisation operations to avoid inflation (sterilised debt
monetisation); in operation 2010-2012
Main ECB concern – risk of contagion; SMP allowed
Eurozone banks to unload Greek & other Southern European
countries’ government bonds on to ECB
EZ bank exposure to S. Europe
IMF: ‘Contagion from Greece was a major
concern for euro area members given the
considerable exposure of their banks to
the sovereign debt of the euro area
periphery’ (IMF,2013:8)
Varoufakis: “None of the bailouts had the
purpose of solving Greece’s problems.
The original bailout was a cynical ploy for
transferring losses from the books of the
German and French banks onto the
shoulders of the Greek, German and
French taxpayers. The second bailout was
merely an acknowledgment that the first
bailout had imposed upon Greece
conditions that it could never meet.
Similarly with the one being prepared
now.”
(http://yanisvaroufakis.eu/2013/09/02/waschancellor-merkel-about-greece/#more-4174
The second Adjustment Programme, March 2012 –
Private Sector Involvement
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Troika forecast “GDP is expected to decline by 4% in 2010
and some 2,5% in 2011” failed completely; GDP declined by
5.3% and 8.9% while public debt ratio increased to 146% &
171% of GDP respectively
New €133 bn loan and additional fiscal austerity measures
Priority given to debt servicing payments; segregated account
Obtaining political assurances from the leaders of the two
major political parties
PSI (debt restructuring) reduced value of GGB by 53%; this
affected approx. 30% of debt while it absorbed 72% of bail out
II (Euro 93.5 bn)
Public debt ratio declined to 157% GDP in 2012 only to
resume its upward climb in 2013 at 175% as GDP continued
to fall
The role of the ECB in 2012 - ‘preferred
creditor status’
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“Marketable debt instruments issued or fully guaranteed by
the Hellenic Republic will become in principle eligible upon
activation of … a number of measures aimed at assisting
Greece in its adjustment programme. This is expected to take
place by mid-March 2012” (ECB Press Release 28/2/2012)
2nd Adjustment Programme signed on 2/3/2012: GGBs
accepted as collateral in Eurosystem credit operations as of
8/3/2012
PSI did NOT reduce value of GGB held by ECB as part of its
SM Programme; ECB enforced its ‘senior creditor status’ –ie,
it should get its money back first in case of insolvency
‘Seniority’ is a source of instability as private investors react
by selling bonds (P.de Grauwe, 2012)
Financial instability: 2-year & 10-year maturity government
bond yields of Spain, Italy, and Germany, 2010 - 2012
Draghi’s pledge ‘to do whatever it takes’ –
Outright Monetary Transactions 2012-2015
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Following Greece, Ireland (Dec. 2010) and Portugal (May
2011) also agreed on an Economic Adjustment Programme
for a financial package of €85 bn and €78 bn respectively
However financial stability spread across the financial
markets; the Italian and Spanish government bonds came
under pressure raising fears of imminent collapse
ECB ‘Outright Monetary Transactions’ (OMT) programme:
ECB makes purchases in secondary sovereign bond markets
of bonds issued by EZ member-states, in order to prevent
divergence in short-term bond yields; no ECB seniority claims
OMT, limitless but subject to conditionalities - 1. existence of
adjustment programme, 2. satisfactory compliance, 3. gaining
access to bond markets, although 4. trading under stress
ECB worries over low inflation in Eurozone –
(Year-on-year % change in Consumer Prices)
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Shift in ECB main concern from
halting contagion to getting
inflation back to ‘below but close
to 2%’ as per its mandate
(consumer price index: <1% since
2014)
ECB deposit rate turned negative
in June 2014 & December 2015
(ECB charges banks 0.3% to hold
their cash overnight)
Rates below zero have never
been used before in an economy
as large as the euro area
Liquidity trap: banks hoard the
reserves they accumulate
More ECB ‘unconventional’ measures – ‘Asset
Purchase Programme’ or QE, 2015 - 2017
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The OMT instrument was never actually used even though it is
considered to have been effective in stopping contagion
It did however pave the way for APP in legal terms –OMT were
challenged in German Fed Constitutional Court by German MPs;
ECJ ruling (June 2015) declared OMT to be legal as they “do not
exceed the powers of the ECB in relation to monetary policy and
do not contravene the prohibition of monetary financing of EU
nations”
Asset Purchase Programme (APP): Announced on 22/1/2015, it
consists of monthly purchases of public and private assets to the
amount of Euro 60 bn; Euro 1.1 trillion to be allotted in proportion
to the size of member states until March 2017
Dec 2015: APP Euro 650 bn (75,5% public assets); large
countries benefit the most (Dec 2015: Germany 24%, France
19%, Italy:16%)
Political realignments – Electoral results 2009-2015
Per cent Share of
votes
New Democracy
2009
June 2012
May 2014
January
2015
September
2015
33.5
29.6
22.7
27.8
28.1
4.6
26.9
26.6
36.3
35.5
PASOK (Panhellenic
socialist movement)
43.9
12.3
8.0
(ELIA)
4.7
6.3
Independent Greeks
(split from ND)
--
7.5
3.5
4.8
3.7
Golden Dawn (fascists)
--
6.9
9.4
6.3
7.0
DIMAR (Democratic
Left; split from SYRIZA)
--
6.3
1.2
0.5
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KKE (Communist Party)
7.5
4.5
6.1
5.5
5.6
LAOS (extreme right)
5.6
--
--
--
--
POTAMI (centrist)
--
--
6.6
6.1
4.1
CENTRISTS (Leventis)
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--
--
--
3.4
SYRIZA (Radical Left)
(& DIMAR)
The negotiations marathon
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Government sworn in 27th Jan; 2012 loan expiring in Dec 2014
extended by previous government to end Feb 2015 (Tsipras: ‘we
were trapped’); outstanding tranches of loans (7.2 bn Euro)
payable on completion of Troika review
Tight repayments schedule: end April 2015: IMF, 2.937 bn Euro
& roll over short-term T-bills bought by Greek banks, 11 bn; end
August: IMF, 2.522 bn & ECB, 6.7 bn; end 2015: IMF, 3.247 bn
Tsipras (Le Monde, 31/5/2015): seeking ‘a mutually beneficial
agreement that will set realistic goals regarding surpluses, while
also reinstating an agenda of growth and investment’
5th July Referendum: Yes/No to creditors’ proposals; 61.3% No
Tsipras (interviewed ,14/7/2015): ‘The result of the Euro Summit
and the Eurogroup was the result of a strong pressure on a
country, which had democratically expressed itself, to satisfy the
more financially powerful countries in Europe. That is the truth’
The third Adjustment Programme, August 2015
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New loan Euro 86 bn, of which 54 bn for debt service (63%), 25 bn
for Greek banks (29%) and 15 bn for arrears clearance & budget
cash buffer (17%)
Not included in above sum: expected primary surplus Euro 6 bn &
expected proceeds from privatisation Euro 2.5 bn
Loan maturity: 32.5 years; Interest rate: funding cost + fees, approx.
1% at present
Conditionality: further fiscal consolidation; recapitalisation of Greek
banks; structural/institutional reforms
Deficit/GDP targets: 2015, -0.25%; 2016, +0.5%; 2017, +1.75%;
2018, +3.5%; primary surplus transferred to segregated account for
debt service + 30% of any over-performance
Privatisation – Fund “to manage valuable Greek assets & to
maximise their value which it will monetize through privatisations
and other means”; expected proceeds 50 bn by 2030, of which 75%
for debt service and 25% for investment
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
Jan-10
Apr-10
July-10
Oct-10
Jan-11
Apr-11
July-11
Oct-11
Jan-12
Apr-12
July-12
Oct-12
Jan-13
Apr-13
July-13
Oct-13
Jan-14
Apr-14
July-14
Oct-14
Jan-15
Apr-15
July-15
Oct-15
Greek banking system – Deposit flight;
increase in NPLs
Total bank deposits (% change)
10.0
5.0
0.0
The role of the ECB in 2015 - Guardian of stability or
enforcer of the creditors?
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ECB intensified conditions of asphyxiation for the Greek banks and
economy by (1) 4th Feb: lifting waiver of min credit rating
requirement for GGBs thus shifting banks to a costlier source of
borrowing (ELA) (2) 26th June: freezing amount of funding (at 89 bn
euro) available to Greek banks after July referendum announced; (3)
6th July: imposing a haircut on GGBs used as collateral
Flight of deposits (15% in Jan-June 2015); steep increase in NPLs;
capital controls (banks closed for three weeks after 28th June);
danger of collapse of banking system
Paul de Grawe: “The correct announcement of the ECB should be
that it will provide all the necessary liquidity to the Greek banks.
Such an announcement will pacify depositors. The ECB has other
objectives than stabilising the Greek banking system. These
objectives are political. The ECB continues to put pressure on the
Greek government to behave well.”
Where we stand now – What role for the ECB
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Greek banks were stress-tested and recapitalised by end 2015;
no bail-in of unsecured deposits; government contribution: <6 bn
euro (25 bn budgeted in 3rd loan)
ELA funding reduced to 77 bn euro (Nov 2015) from cap of 89 bn
euro (June 2015); Waiver of min credit rating requirement for
GGBs has not been reinstated; Draghi: “still too early to reinstate
a waiver that would give Greek banks access to the funding
window … Athens would have to first comply with and “show
strong ownership” of its bailout program” (Sept 2015)
Capital controls still in place, albeit gradually relaxed
The Greek economy remains in the clutch of a crushing public
debt; negotiations on debt relief expected to take place in 2016
The ECB can play an important role in getting the Greek
economy out of the debt-deflation deadlock: reinstating waiver,
abolishing haircut, returning profits on SMP, admitting GGB to
APP