Article published on from Mr. Panayiotis Sotiris

This is how Greece will get into QE – The Draghi role and what will happen to the economy.  Mario Draghi leaves QE prolongation, but for Greece may not be easy to join.

It was Mario Draghi’s last major political decision as Governor of the European Central Bank. Despite the backlash from central bankers such as Germany, it has ensured that the ECB will continue its program of quantitative easing, namely the purchase of government but also bank bonds and securities in order to continuously provide liquidity to the banking systems and ultimately to re-energize the European economy. . It was this program, after all, that made a decisive contribution to getting the European economy out of crisis.

Draghi insisted that it was important to continue the program to respond to the risk of deflation, while arguing that the limits of monetary policy and central bank intervention were exhausted and that governments needed to boldly try to change the policy mix. go beyond the narrow bounds of budgetary discipline and intervene to revitalize the economy. In fact, one could say that he threw the glove at governments by calling on them to face up to their responsibilities.

Because Greece was left out of the first QE when the first quantitative easing program in Europe was launched, Greece could not participate. The reason was that the country was in the midst of memoranda, it could not have real and permanent access to the international financial markets, the viability of Greek debt was precarious and lenders were constantly calling for even greater cuts in public spending, anyway. Ratings by foreign debt agencies were particularly low. At the same time, the banking system was in deep crisis, mainly due to the huge volume of non-performing exposures (“red loans”) and overall the country remained in a state of “emergency” for a long time with the symbolic concentration of capital controls for a long time (four years).

What are the conditions for Greece to join QE?

In his latest appearance at the European Parliament, Mario Draghi was asked about possible Greek participation in the QE.

“Greece has made significant progress in reforms over the past few years and has recorded great growth. This is recognized, as the low interest rates show. If credibility is boosted and credit conditions are upgraded, Greece will be able to participate in the quantitative easing program, “he said, speaking to members of the European Parliament’s Committee on Economic Affairs. At the same time, he argued that there was a need “to further enhance the credibility and confidence of the capital markets. So this is essential for shaping fiscal policy. The results have exceeded the goals more than once. So overall economic developments recognize that there is progress in the country. ” Finally, he did not fail to emphasize the importance of addressing the issue of ‘red loans’. He argued that “a high amount of non-performing loans leads to a vulnerability of the banking system, which does not fund the private sector. However, we need to cut red loans without forgetting the social aspect. ”

All this translates into specific requirements that the Greek side must fulfill in order to be able to participate in the QE.

Insist on structural change.

The first requirement concerns the overall course of the economy. Greece is required to demonstrate that it is continuing in a very specific direction, based on the continuation of the privatization program, the attraction of foreign direct investment, the institutional changes that facilitate investment activity, and overall the formation of a business-friendly climate. So far, international markets have had a positive reaction to the state of the Greek economy and the actions of the Greek government, something that was indirectly reflected in the significant decline in the interest rates of Greek bonds, especially the long-term ones.

Striving for a positive assessment of debt sustainability

The second requirement is to have a positive report on the sustainability of Greek debt, because the ECB cannot invest in securities of countries considered to be unsustainable. We remind here that Greek debt is considered viable for the coming years and until 2032, as long as the framework for post-monetary surveillance is complied with, but not later, hence the provision to be fully reviewed. The bet here is to combine the positive trends in the interest rates of Greek bonds, which also affects the terms of overall debt service, with a more positive overall treatment by lenders that could form conditions for a positive viability analysis of debt.

Return of Greek bonds to investment grade

The third requirement, combined with the previous ones, is that Greek bonds are rated by rating agencies as returning to investor grade. So far, rating agencies have avoided such an upgrade of Greek bonds, which is a formal requirement for the ECB to buy Greek securities. But there is optimism in the government that we could soon see ratings firms take the decisive step from the positive outlook in upgrading Greek bonds.

Dealing with the ‘red loans’ problem

The fourth requirement relates to the banking system. As we said, the program of quantitative easing is also addressed to banks. All that means is that banks are also considered to be truly viable.

Their current situation is very contradictory. On the one hand they seem to be able to meet the basic requirements of stress tests on the other they have a volume of non-performing exposures which by its size alone makes them essentially in a problematic state.

In the past there has been a relative delay in designing and launching a related program both because of the difficulties on the part of the banks and also because of the need to formulate a plan where the public guarantee necessary condition of all variants of “special purpose vehicles”. for the transfer of “red loans”, would not be considered State aid that violates the relevant EU provisions.

In this regard, the government is investing in the “Heracles Plan”, which is how the government named the asset protection scheme (APS) to reduce banks’ red loans, submitted by Deputy Finance Minister George Zavvos to the European Commission. The central idea of ​​the scheme is to transfer the banks’ red loans into a special purpose vehicle and securitize them into three categories, depending on their quality, senior, mezzanine and junior. The Greek State will guarantee their senior part, and the banks will pay a commission for that guarantee. The aim is to bring in non-performing loans of around € 30 billion out of a total of € 75 billion with government guarantees reaching € 9 billion.

All this means that any attempt to get Greece into the QE is a real battle, and even a difficult one. On the other hand, if Greece can get into the program, this could provide a critical breath of liquidity that remains one of the most crucial demands for a return to growth.