Photographer: Yorgos Karahalis/Bloomberg

ECB Said Unlikely to Include Greece in QE in Coming Months

  • Lack of clarity on debt relief won’t allow ECB bond buying
  • Finance ministers to discuss Greek debt burden this week

The European Central Bank is unlikely to include Greek bonds in its asset-purchase program for the foreseeable future, a person familiar with the matter said, as European creditors aren’t prepared to offer substantially easier repayment terms on bailout loans to improve the nation’s debt outlook. 

Euro-area finance ministers will meet in Luxembourg on June 15 to discuss additional debt-relief measures that the ECB has said are needed before it will consider purchasing Greek bonds. The so-called Eurogroup is also expected to complete a review of Athens’s rescue program that would allow for the disbursement of at least 7.4 billion euros ($8.3 billion) in aid needed for a similar amount of bond repayments in July.

An agreement among the ministers will likely allow the International Monetary Fund -- whose participation in the rescue program is a requirement for many nations -- to commit in principle to a conditional loan, said the person, who asked not to be named because the discussions are private. But the extent and wording of debt-relief commitments probably won’t convince the Governing Council of the ECB to buy Greek bonds.

While Thursday’s meeting should unlock the next tranche of aid to Athens, a failure to reach an agreement with the IMF over the easing of repayment terms for Greece will cast doubts about the sustainability of the country’s debt, making it more difficult for the ECB to include it in its its asset purchases program and ease the country’s return to international markets.

An ECB spokesperson referred to recent comments by ECB Executive Board member Benoit Coeure and ECB President Mario Draghi on the institution’s approach toward inclusion of Greece in QE.

IMF’s Stance

Disagreements between the IMF and Greece’s euro-area creditors over the outlook for the country’s debt and the extent of the relief needed have not yet been resolved, an EU official with knowledge of the talks said on Tuesday, damping expectations for a full deal later this week that would see the IMF immediately disbursing more loans.

If the two sides don’t fully converge on the scope of debt easing at Thursday’s meeting, the IMF can still recommend to its board to participate in the Greek bailout by granting the program an approval in principle, the official said. This means the IMF would endorse the policies Greece has undertaken, but not disburse any further loans until it agrees with the euro area on further debt relief.

And while the government of Prime Minister Alexis Tsipras is relying on quantitative easing to aid Greece’s return to the public debt market, the ECB won’t factor fiscal consequences into its policy-making decisions and excessive emphasis on QE inclusion would be misguided, according to the first official.

The Greek premier told ministers of his government that if the ministers’ meeting does not reach an agreement, the country will seek a resolution at a summit of euro area leaders, according to a Greek government official, who spoke on condition of anonymity.

Calling Merkel

Tsipras "still calls the Chancellor and the Chancellor says then again and again: Alexis, this is a matter for the finance ministers, Euclid should talk to Wolfgang and they’ll get there somehow," German Finance Minister Wolfgang Schaeuble said at a Bloomberg event on Tuesday, referring to his Greek counterpart, Euclid Tsakalotos. "And we’ll get there on Thursday, you’ll see,” he said in Berlin.

Even as inclusion in QE remains in doubt, Greek bonds have outperformed all European sovereigns this year, as the prospect of a deal with creditors on the disbursement of more aid has reduced the risk of default. Yields on Greek notes due in 2019 fell 20 basis points to 4.94 percent in Athens on Tuesday, after Schaeuble said that an agreement will be reached on Thursday for the next tranche of emergency loans. Those securities traded as high as 11.7 percent a year ago.

The ECB’s quantitative easing is scheduled to continue until December 2017, with economists saying purchases will be gradually tapered throughout 2018. This would leave little time for purchases of Greek bonds before the program’s end in August 2018. The EU official speaking to reporters in Brussels on Tuesday said that no debt relief measures will be decided and implemented before the Greek program ends.

French Plan

Meanwhile, France, which is trying to bridge differences on the debt issue, has proposed automatically reducing loan repayments when Greece misses growth targets, according to two people with knowledge of the talks. European officials see the proposal as a step in the right direction but doubt it will be enough to convince the ECB to include Greece in its bond purchase program if the IMF maintains its position that the country’s debt is unsustainable. Other euro-area member states so far have opposed France’s proposal, the people said.

French Finance Minister Bruno Le Maire, after meeting with his Greek counterpart Euclid Tsakalotos in Athens on Monday, said they were doing their best to reach an accord with the other countries on Greece and said they weren’t far from achieving a deal. Some mention of the French plan may be included in the Eurogroup statement on Thursday, though technicalities will be left to be worked out later, according to one of the officials familiar with the talks.

“We need an agreement now and we need a disbursement now for economic recovery in Greece to remain on track,” Valdis Dombrovskis, the European Union commissioner in charge of financial services policy, said on Tuesday. “Successful conclusion of the second review would be a critical step for Greece on its way to sustainable growth and job creation and eventually to return to markets.”

— With assistance by Sotiris Nikas, Nikos Chrysoloras, Antonis Galanopoulos, and Matthew Miller

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