Market commentary: Greek debt and the ECB hard stand

The equity markets witnessed a mixed session on Wednesday with the Euro Stoxx 50 ending flat on the day, the German Dax and French CAC 40 closing slightly positive and the FTSE 100 finishing slightly in the red.

The US markets followed suit ending negative for the day with the exception of the Dow Jones Industrial Average which closed flat. Asia market experienced “chopping trading” with the Nikkei 225 deep in the red, the Shanghai Index also lower by over 1% and the Australian and New Zealand markets remaining in positive territory.

The major news this morning is coming from the European Central Bank that last night announced it has suspended the waiver granted to below investment grade Greek Government bonds, and that starting Feb. 11 it will no longer accept them as collateral for its refinancing facilities.

Although being a rather technical matter, the repercussions of this announcement are very father reaching and will directly affect Greece economy and its banking system. In other words, Greek commercial banks will no longer be able to access ECB’s refinancing facility by pledging Greek Government bonds as collateral.

This is going to put additional pressure on the country’s banking system that now will have to rely on its own Central Bank throughout the so called “Emergency Liquidity Assistance (ELA)” facility, which grants short term loans to EU commercial banks in need of emergency liquidity injections.

As a result, the borrowing costs of the Greek banking system is jumping form ECB’s refinancing rate of 0.05% to ELA’s rate of 1.55%, increasing concerns that the entire banking system will not be able to finance itself, let alone support the Greek economy into a multi-year recession spiral.

The ECB hard stand comes at a moment when the Greek Prime Minister and Finance Minister are cruising Euro Zone member states in a desperate attempt to shore up some support for the country’s recent proposal to impose a debt restructure that in the best case scenario will ask creditors to accept growth-linked bonds (and therefore deferring and linking any payment to hoped future growth), and in the worst case scenario will mandate a haircut north of EUR 315 billion, amounting to about 170% of Greece gross domestic product.

So far, Greek Prime Minister has failed to round up consensus allowing him to scrap the existing bailout agreement and to renegotiate a new deal, with German Chancellor Angela Merkel and French President Francois Hollande indicating that they have no intention to return to the negotiations’ table.

Following this news, the Euro dropped 1.37% against the Dollar yesterday, although it is posting some gains in early trading this morning. With markets starting to increase the odds of Greece leaving the Euro, the currency will probably continue to appreciate in the short term to reflect its new value in the case of a Greek exit, trend that could partially decrease the effectiveness of QE, which was also aimed at extending the ongoing Euro depreciation.

Greek bonds rose by 28 basis points yielding 9.8% and approaching, once again, the important psychological level of 10%, while the Athens Stock Exchange experienced another day of rather high volatility falling over 2.5% before rebounding and ending Wednesday’s session up 0.9%.

With Greece desperately attempting to renegotiate its rescue package deal and its banking system now precluded from accessing the ECB’s refinancing facility, the main questions investors are asking themselves are: “will Greece really end up leaving the Euro soon?”, and if so “what will the future of Euro be?”.

This article was issued by Paolo Zonno Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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