UPDATE: The FT article on the non-haircut haircut for Greece printed before the European close but did not become widespread until the afternoon in the US when a catalysts for a technical ramp was required... simply put - Greek bank bonds suggest a haircut is coming at a minimum.
Despite Greek Government Bonds bouncing modestly higher (and marginal improvement in Greek stocks) today, the epicenter of the Greek crisis - their banking system - appears to continue crashing. As the ECB's decision to accept junk Greek collateral (as it does now) for ELA funding or not - a purely political decision - looms, the message from the Greek bank bond market is "nein nein nein." As Professor Karl Whelan exclaims, don’t believe for a minute that this is a technocratic thing to do with "the ECB having to follow its rules." And it has almost nothing to do with Greek government bonds being junk-rated. All of the issues come down to discretionary decisions by the ECB and there is plenty of wiggle room for them to allow Greek banks to continue receiving various sources of funding next month in the absence of an EU-IMF program agreement.
Greek bank bonds are flashing red-est that ECB's decision may be a troubling one...
One of the key uncertainties surrounding the situation in Greece is the relationship between the Greek banks and the ECB. Lots of press coverage is suggesting the ECB has a set of well-established rules that mean it will not be able to lend to Greek banks in March unless the government negotiates a new EU-IMF program to replace the one expiring at the end of this month.
Well the ECB has almost complete discretion over which banks it lends to. I have written about the ECB’s Risk Control Framework before and it’s been rolled out regularly in the years since I wrote that post. The bottom line is that the ECB can single out specific institutions and decide to not lend to them for pretty much whatever “risk-related” reason they feel like putting forward.
The ECB is pretty clearly playing from its tried and tested playbook in their current stand-off with the Greek government. Governing Council members know they can cut off lots of credit from the Greek banks in March and many of them are happy to tell the world they are thinking about doing this. As a result, they hope to get Greece’s new government to sign a new deal with the EU and IMF.
But don’t believe for a minute that this is a technocratic thing to do with “the ECB having to follow its rules.” And it has almost nothing to do with Greek government bonds being junk-rated. All of the issues discussed above come down to discretionary decisions by the ECB Governing Council (restrictions on T-bills, waivers on junk-rated government bonds, arbitrary lines-in-the-sand on government guaranteed bonds and the mysterious rules of ELA) and there is plenty of wiggle room for them to allow Greek banks to continue receiving various sources of funding next month in the absence of an EU-IMF program agreement.
I fully expect the ECB-as-heavy-hearted-technocrat angle to dominate press coverage of this story this month. That’s a pity because the “ECB in politicised mission creep while helping trigger a bank run” story is more interesting and closer to the truth.