Another reverse for Greece with Berlin yet to come

February 5, 2015

Greek Finance Minister Varoufakis answers journlists questions at restaurant in Frankfurt

Last night, after Greece’s new Finance Minister Yanis Varoufakis met Mario Draghi, the European Central Bank cancelled its acceptance of Greek bonds in return for funding, shifting the burden onto Greece’s central bank to finance its lenders, the latest reverse for the country’s new government.

Varoufakis and his prime minister, Alexis Tsipras, have spent this week touring EU capitals trying to build support for a shift away from austerity and a new debt dispensation for Greece and have found virtually no support in Paris, Rome, Brussels or Frankfurt.

Varoufakis meets German Finance Minister Wolfgang Schaeuble in Berlin today. He shouldn’t hold his breath.

The German position is abundantly clear, revealed by an exclusive we ran yesterday. A document prepared by Berlin for a meeting of senior euro zone finance officials said as far as it was concerned, the new Greek government had no leeway to go back on anti-austerity promises made under its bailout programme and cannot roll back on any of them.

The ECB move means it now falls on Greece’s central bank to provide banks with Emergency Liquidity Assistance (ELA), a step it takes at its own risk, ringfencing those banks’ funding problems from the rest of the euro zone and making their borrowing costs more expensive.

In extremis, the ECB Governing Council could even vote to scrap ELA thought that won’t happen because it would almost certainly prompt the collapse of the Greek banking system and the country’s exit from the euro.

Nonetheless, this is yet another warning shot to Athens that it cannot unilaterally change the terms of its debt which is overwhelmingly held by the euro zone bailout fund, the ECB and euro zone governments.

At home, Greek media are extolling the efforts of Tsipras and Varoufakis, and there is considerable economic merit in the argument that by fostering growth, debt will eventually fall via higher tax receipts etc. However, a crunch point is approaching fast and the deal on offer to Athens has changed not one jot.

Greece could be given more time to pay off its debt if it keeps its budget in balance and maintains promised reforms but the debt will not be written off. Where there could more flexibility is on austerity. Greece is tasked with running a hefty primary budget surplus and could be allowed to eat into that a little.

ECB chief economist Peter Praet is already out, saying it merely applied its rules in ending the waiver on credit requirements for Greek bonds, namely that the country has to be in a bailout programme or actively seeking one. However, the ECB had previously signalled that it would make no move until the bailout actually expired on Feb. 28.

Bundesbank chief Jens Weidmann speaks later. The German central bank is deeply uncomfortable about even ELA, fearing that the emergency funds will be used by Greek banks to buy more short-term government treasury bills which will then be presented to the Greek central bank as collateral for further funds in what looks uncomfortably like a Ponzi scheme.

There is a 15-billion-euro cap on the banks’ holdings of T-bills but Greece has asked for an increase in that cap by 10 billion euros, according to Greek media.

French President Francois Hollande holds a major set-piece news conference in line with a pledge to meet the media at least twice a year.

While his approval ratings have for some time been the worst of any post-World War Two French leader, Hollande has suddenly found himself in a potentially stronger position, buoyed by broad approval of his handling of the Islamist militant attacks.

Hollande has already declared the euro zone’s rules applied to everyone, including Greece, but it will be interesting to see if he takes up again a call to do more to kickstart growth in a moribund euro zone economy.

German industry orders, just out, have leapt far more than forecast in December, hitting their highest level since April 2008. Later, the European Commission presents its latest economic forecasts for all EU members.

Spain will issue up to 4.5 billion euros at a triple bond auction. France will sell up to 9 billion euros of long-term bonds.

U.S. Secretary for State John Kerry visits Kiev for meetings with President Poroshenko which  might reveal latest U.S. thinking on financial and military support for Ukraine.

President Barack Obama’s pick to become defense secretary told Congress he was leaning towards providing arms to Ukraine but said the focus must remain on pressuring Russia economically and politically.

Poroshenko said mounting civilian deaths in eastern Ukraine meant NATO states must send weapons. NATO defence ministers meet in Brussels to discuss what steps the alliance will take to boost the defences of eastern European allies.

The central bank world has been upended by a combination of cheap oil and the prospect of the ECB unleashing a flood of euros. Australia became the latest in a long line to cut interest rates this week, its first easing since August 2013 and China relaxed reserve requirements for banks.

The Bank of England delivers its latest decision today and is very firmly on hold after two of its nine rate-setters who had been calling for tighter policy have now thought again with oil pushing inflation through the floor and expectations of a mid-year rate rise disappearing over the horizon.

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