ECB Helps Greek Plans for New Debt to Fight Virus Pandemic
The euro sign sculpture stands illuminated near the former ECB headquarters, in Frankfurt. (Photographer: Krisztian Bocsi/Bloomberg)

ECB Helps Greek Plans for New Debt to Fight Virus Pandemic

(Bloomberg) -- The European Central Bank’s decision to accept junk-rated Greek government bonds as collateral paves the way for the country to finance its fight against the coronavirus while bolstering banks’ liquidity.

It means the nation is confronting its latest economic crisis -- this time one shared by the entire euro zone -- in a far better position than a decade ago. In May 2010, Greece was deep in a financial meltdown with so little liquidity that it would have been bankrupted without international aid.

Now Prime Minister Kyriakos Mitsotakis has the luxury of a cash buffer of around 36 billion euros ($39 billion), and a way to raise more when needed.

The ECB has taken three decisions in the past month that clear the way to issue new bonds and support banks’ liquidity.

First it ended the limit imposed since early 2015 on the exposure of Greek lenders to the country’s sovereign debt. Then it decided to include Greek notes in its new pandemic bond-buying program.

On Tuesday, it took multiple temporary steps to support credit to the economy. While those measures mostly apply across the bloc, Greece, accounting for less than 2% of euro-zone GDP, is clearly a winner. The country’s 10-year bond held onto gains after the announcement.

The measures significantly broaden Greek banks’ funding sources and so helps them support businesses and households, Finance Minister Christos Staikouras said after Tuesday’s decision. It should also boost the tradeability and valuation of Greek debt, he said.

At the end of the last bailout in August 2018, the nation’s creditors granted loans to create a cash buffer of 15.7 billion euros for use in any emergency. It also has an extra cushion of around 20 billion euros in state cash reserves, which can be used at any time without prior approval from creditors.

The government has already allocated some 12 billion euros to fund measures to contain the economic effects of coronavirus outbreak through the end of June, according to people familiar with the issue, who requested anonymity as details haven’t yet been made public.

Greece, with a population of close to 11 million people, has almost 2,000 coronavirus cases and has reported 81 deaths so far.

To maintain current measures, the government needs around 5 billion to 6 billion euros a month, one of the people said, meaning the 36 billion euros can last until at least the end of September. The government’s baseline scenario is that it won’t use the cash buffer of 15.7 billion euros.

Staikouras said on Tuesday in a TV interview it is possible the administration could also issue new bonds in the coming two months if needed.

©2020 Bloomberg L.P.

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