The European Central Bank acted to ease Greek banks’ access to funding by accepting the country’s bonds in exchange for cash for the first time since July.
The Frankfurt-based ECB said today it will take debt instruments issued or guaranteed by the Greek government as collateral again, citing “the wide range of measures already implemented by the Greek government in the areas of fiscal consolidation, structural reforms, privatization and financial sector stabilization.”
Greek banks had been reliant on more expensive emergency funds from their own central bank since the expiry of a temporary guarantee on July 25. An agreement by European officials last week to pay Greece a 49.1 billion euro ($65 billion) slice of European Union and International Monetary Fund bailout loans has boosted optimism that the debt-stricken country will be able to push through economic reforms and stay in the euro.
Standard and Poor’s yesterday raised Greece’s credit rating to B-, the highest since June 2011, after a bond buyback helped reduce its debt burden. Greek Finance Minister Yannis Stournaras said today the upgrade was a “great success” for his country.
Banks led gains on Greece’s benchmark ASE Index after the ECB’s announcement, with Eurobank increasing 10 percent and Piraeus Bank advancing 11 percent. The ECB had held open the prospect of a return to more normal funding for Greek banks should they receive a positive review from their international donors.
Greek bonds have surged 85 percent this year, the best performance among 26 markets tracked by indexes from the European Federation of Financial Analyst Societies. The 10-year yield, at 12.8 percent, is about a third of its high this year, and its spread to benchmark German bunds has collapsed to about 11 percentage points, the least since April 2011.
S&P said that Greece’s deficit-reduction plan, which is based on tax increases, improved tax collection, privatizations, and government spending cuts, may still go awry.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook this year, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974. This year, investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P.
“We believe these adjustments carry implementation risks given the projected further output contraction in 2012 and 2013, which will likely see social pressures persist,” S&P said.
The Organization for Economic Cooperation and Development forecasts the Greek economy to shrink 6.3 percent this year, 4.5 percent in 2013 and 1.3 percent in 2014.
The ECB said Greek bonds will now be subject to “special haircuts,” to be specified in a legal act implementing the changes on Dec. 21.