Draghi’s First 100 Days Presage Greek Help

10.02.2012 14:05

Bloomberg: In his first 100 days as European Central Bank President, Mario Draghi has taken unprecedented action to tackle the sovereign debt crisis. Greece may push him even further into unknown territory.
Draghi will today face questions on the ECB’s possible role in helping Greece reduce its debt as the threat of a disorderly default mounts. While the ECB has remained silent on its intentions, options canvassed range from selling its Greek bond holdings at the discount price it paid for them to taking a loss on the Greek assets held in investment portfolios, two euro-area officials said late last week on condition of anonymity.
At stake is whether Greece can complete a private sector deal to lower its debt by as much as 100 billion euros ($133 billion) and secure a second bailout package that will allow it to pay its bills -- key steps toward ending the debt crisis. The ECB has been instrumental in easing the turmoil since Draghi took the reins on Nov. 1, offering banks unlimited three-year loans and reversing the two rate hikes implemented by his predecessor, Jean-Claude Trichet.
“When Mario Draghi looks back this week at his first 100 days as ECB president, he can be satisfied,” said Carsten Brzeski, senior economist at ING Group in Brussels. “But pressure on the ECB to join the burden sharing on Greece has increased. Everything will be done to avoid a disorderly default, at least in the short term.”
Interest Rates
ECB policy makers meeting in Frankfurt today, Draghi’s 101st in office, will keep the benchmark interest rate at a record low of 1 percent, according to 55 of 57 economists in a Bloomberg News survey. Two predict a cut to 0.75 percent. The decision will be announced at 1:45 p.m. and Draghi holds a press conference 45 minutes later.
Separately, the Bank of England expanded its asset-purchase program by 50 billion pounds ($80 billion) to 325 billion pounds and left its key rate at a record-low 0.5 percent.
Greece remains center stage in Europe more than two years after it triggered the debt crisis with its ballooning debt.
Premier Lucas Papademos is still struggling to unite political parties on the austerity measures needed to secure a second bailout from euro-area governments, while a deal to write off 70 percent of the value of bonds held by private investors remains to be finalized. Greece’s private creditors plan to meet in Paris today.
‘Issues Outstanding’
Greek Finance Minister Evangelos Venizelos said this morning there are still “issues outstanding” that must be resolved by the time euro-region finance ministers meet later today. That meeting is scheduled for 6 p.m. in Brussels, Luxembourg Prime Minister Jean-Claude Juncker said late yesterday, without specifying an agenda. Euro-area politicians must sign off on any Greek aid accord reached by negotiators.
The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since May 2010. Between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
The ECB is considering selling those bonds to the European Financial Stability Facility at the knock-down price it paid for them, forgoing any profit, two euro-area officials said late last week. The EFSF could then pass that saving on to Greece or even take a loss on the bonds, helping to alleviate the nation’s debt load without compromising the ECB’s independence. There are still hurdles to that option, the officials said.
Three-Year Loans
Another course is for euro-area central banks to give up profits or take losses on Greek bonds in their separate investment portfolios, which are not part of monetary policy operations.
So far, Draghi hasn’t signaled any ECB involvement in a Greek restructuring. Instead, the ECB has focused on warding off a looming credit crunch and encouraging lenders to re-enter sovereign debt markets.
On Dec. 21, it allotted a record 489 billion euros in three-year loans to banks, the first of two such operations. In the run-up to the second offering on Feb. 28, the central bank is finalizing a broadening of the pool of collateral banks can use to obtain the cash.
‘Doing More’
“The ECB is doing more,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Six months ago we basically had the ECB fighting behind the scenes with the politicians, there was a lot of uncertainty. Now, while Greece is still an issue, they seem to be moving roughly in the same direction.”
European leaders have taken up Draghi’s idea of a “fiscal compact,” agreeing to a treaty that will speed sanctions on high-deficit states and require euro countries to anchor balanced-budget rules in national law.
There are signs that Draghi’s strategy is paying off. Bloomberg indexes of Europe’s banks and financial conditions are the highest since August, and money-market lending rates and bond yields from Italy to Spain are sliding.
Banco Bilbao Vizcaya Argentaria SA is selling senior, unsecured bonds in the first benchmark offering of the debt from a Spanish bank since October. Intesa Sanpaolo SpA, Italy’s second-biggest bank, sold senior, unsecured bonds last month, and Commerzbank AG, Credit Agricole SA and Allianz SE are also planning to issue unsecured debt.
Economic Growth
Intesa Chief Executive Officer Enrico Tommaso Cucchiani said this week that some of the money from the ECB’s three-year tender will be used to buy Italian government bonds.
“If the euro crisis is kept under control, the chances of economic growth returning in the third quarter for the euro zone as a whole are good,” said Christian Schulz, an economist at Berenberg Bank in London.
It remains unclear exactly how big Europe’s permanent financial backstop will be, leaving the ECB exposed in the event of a Greek default, said Nick Kounis, head of macro research at ABN Amro in Amsterdam.
“The lack of a firewall is what ultimately creates pressure for extra responsibility for the ECB,” Kounis said. “If the talks in Athens fail, then they may have to deal with a re-escalation of the whole crisis spiral that we saw last year.”
reporters on this story: Jana Randow in Frankfurt