Greek Bonds may Soon be Included in ECB Purchases

The ECB does not include Greek bonds in its
sovereign bond purchase operation. 
However, the progress is being made, and it is possible that starting
early next year, the ECB will buy Greek bonds.  

Greece Deputy Finance Minister Chouliarakis
told the EU Parliament that a staff-level agreement is possible before the end
of the year. 
There are two challenging issues:  labor market
reforms and primary budget target.  

Reforms in the labor market include collective
bargaining and dismissals, as well as n industrial action rules.
  
Collective bargaining reportedly broke down after the 2012 reforms.  That
said, Greece’s largest unions have called a general strike for Thursday to
protest the tax hikes and labor reforms. 

In May, the Greek government agreed to post a
primary budget surplus (excluding debt service costs) of 3.5% (of GDP). 

The Eurogroup of EMU finance ministers reiterated the importance of this
agreement and wanted the 3.5% target to be
maintained
after 2018.   It is not simply that Greece does not want
to maintain such a large primary surplus indefinitely, it is also that economic
literature suggests it not particularly
likely or effective.   Sometime
after 2018, Greece wants to reduce the primary surplus target to 2.5% (using
the 1% reduction to be used to lower taxes, leaving aside dynamic scoring) and
then 2% over the long term.  

The European finance ministers continue to
demand more from Greece.
  They called on Prime Minister Tsipras to
adopt “serious” reforms.  However, it is the finance minister, not the Greek government that is the
most formidable obstacle preventing the IMF’s participation.  

The finance ministers offered a few accounting
ploys to reduce Greece’s cumulative debt by 20 percentage points (relative to GDP) through 2060.
  These
measures include easing the repayment schedule, waiving a coupon penalty, and
swapping debt to mitigate interest rate risks. 

The IMF says that these measures are
insufficient to put Greece’s debt on a sustainable path.
  It argues
that the fiscal targets are not realistic. The finance ministers have ruled out
nominal reductions in Greece’s obligations, but the IMF demands quantifiable
and concrete debt relief for Greece.  Because this has not been
forthcoming, the IMF is unlikely to participate in a new loan
facility.  

Reaching a new staff agreement would recognize
the progress Greece is making and underscore the commitment to additional
measures. 
The staff agreement implicitly assumes that the debt is
sustainable.  This is what the ECB
needs to hear before Greek bonds can be including in its QE operations. 
It would boost confidence that the ECB will buy Greek bonds if the IMF also found Greece’s debt was
sustainable.  With the disagreement between the finance ministers’
assessment and the IMF’s, the ECB is in an awkward position.  Even if it
conducts its own sustainability
assessment, which it says it will do, it
will be difficult to override the finance ministers.  

The ECB  already accepts Greek bonds as
collateral for loans to Greek banks.
  It also has bought EFSF bonds
from Greek banks under the asset purchase program.  Buying Greek bonds is
an incremental step.  The amounts will be small.  It ought not to be surprising if the ECB includes Greek
bonds by late Q1 17.  

Disclaimer

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