How long before Greece can rely on some more help from the ECB ?

Today has already seen a flurry of news from Greece and  in addition to the re-opening of the banks there has been quite a bit of borrowing and repayment activity. It would appear that the Greek government was either under instruction to settle its debts promptly or decided to do so of its own accord. Thus some 6.8 billion Euros of debt has been repaid according to Bloomberg. If we look at the list we see what might be called a likely crew. The main payment was just over 4 billion Euros to the European Central Bank (ECB) followed by the settling of 2 billion Euros to the International Monetary Fund (IMF) and the rest to the Bank of Greece.

The reasons for this were that as part of its Securities Markets Programme the ECB had been buying Greek debt to support the price and reduce the yield. Some of that can was kicked forwards to today as the bond has matured and the capital needed to be repaid as well a coupon or interest payment. This will be a reasonably frequent event as the ECB initially chose to buy short-dated bonds because the “shock and awe” bailout operations were predicted to work quickly. It is hard to know whether to laugh or cry at that. Also various IMF repayments which have been missed have been settled as well as the account at the Bank of Greece which was raided to make an IMF repayment.

Bridge Finance

The obvious problem with the paragraphs above is that Greece lacked the money to make such payments as in the case of the IMF it would have already done so. Step forwards the EFSM or European Financial Stability Mechanism! It has loaned some 7 billion Euros to Greece and of that there is now only a relative pittance left.

You may wonder why the grandly named European Stability Mechanism was not used for this purpose? After all it is the “the permanent crisis resolution mechanism for the countries of the euro area.” However as you can see from the quote below it has what is financial terms might be compared to the turning-circle of a super-tanker.

The institutions will start negotiating the Memorandum of Understanding (MoU) with the Greek authorities.

Once done it can lend but not before which as I have pointed out before is a clear flaw for an organisation to provide stability. Thus the nine nations of the European Union (including the UK) found themselves providing bridge financing to a Euro area problem. Still at least the EFSM has a quality song written by Paul Simon.

When times get rough
And friends just can’t be found,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.

What about QE for Greece?

We open with one rule of ECB club, which is that the ECB must always be repaid in full and on time! That has been fulfilled this morning although quite how it can walk away with a profit from this is beyond me in terms of moral behaviour. Because of the distressed state of the Greek bond market back then it would have paid much less than 100. Also Euro area taxpayers and for a time European Union taxpayers are financing its profits in an example of round-tripping.

However if we go back to last Thursday ECB President Mario Draghi dropped various hints that Greece may not be the one Euro area country where his Quantitative Easing bond buying programme is not taking place for too long.

So there is an issue of going back to a rating which would make Greek bonds, eligible for monetary policy.

Constâncio: Or there should be a waiver.

So Vice President Constancio’s slumber was disturbed to remind us that the claim that the ECB is a “rules-based organisation” is one only for when it feels like that.. It can ignore them if it likes. This then went on.

Second point is the limit on how much of each country’s bonds can be bought by the ECB. As some SMP holdings will be repaid on 20 July and afterwards Greece would comply with this limit and there would be some room for doing QE.

You can see that some 3.5 billion Euros of this was cleared only this morning and there is more to come on August 20th when another bond owned by the ECB (3.2 billion Euros) reaches its maturity date.

Indeed Vitor Constancio went further and the emphasis is mine.

So the Governing Council will have to assess, after there is a programme, at a certain moment, that there is a credible compliance with the programme. That may come at the end of the first review, because that would be clear. The Governing Council could nevertheless decide even before that if there was credible implementation. So it’s at the discretion of the Governing Council either to wait for the review or to do it slightly before, if indeed, there is good implementation of the programme.

As the institutions who used to be called the troika before that name became poisonous have if you will excuse me a track record of telling us that Greece is “on track” what do you think is likely to happen next?

If Greece plays ball and the ESM gets on with its review and program then not only will its funding become available but Greece will then probably see itself in the ECB QE programme. Just to give an idea of scale this would have meant that some 1.36 billion Euros worth of Greek government bonds would have been bought in June alone.

What about Greece?

In a financing sense this is a story of two halves. In a capital sense the issue will build as Greece will have to keep borrowing more. Today is a small example of this as interest payments are capitalised and rolled on. However there will be gains in terms of interest to be paid as for example the maturing bond will be financed at a much lower interest-rate should the ESM finally get around to completing its review.

Of course this is yet another version of can-kicking.

What about the Greek banks?

They are open today unlike the Athens stock exchange which remains closed. There has been a slight relaxation of the deposit withdrawal controls as now 420 Euros can be withdrawn a week as opposed to having to make 7 daily withdrawals of 60 Euros. If we do the maths we see that the extra ECB ELA financing of 900 million Euros will finance some 2,142,857 such withdrawals this week.

If we look beneath this though the banking system in terms of lending to businesses must be in a dreadful state. What price credit finance? Or is there any credit finance at all?

The VAT rise

This is another kick in the teeth for businesses. The fall in the value of the Euro was something which hopefully would give a boost to the Greek tourism business. However as we arrive at peak season prices have been pushed higher via the VAT (sales tax) increases. The rate for restaurants and taxis has risen sharply from 13% to 23%.

If we move to the domestic market there are a range of increases including a similar jump as stated above on some foods. This has been estimated by Macropolis as having an average effect of some 650 Euros per household. As net household income is of the order of 13,800 Euros (OECD 2014) we see that this will take quite a bite out of it.

Frankly this seems set to prove that the Laffer Curve can apply to indirect as well as direct taxes.

Today’s data

This rather speaks for itself as an indicator of what has been happening in the Greek economy.

The Turnover Index in Industry (both domestic and non-domestic market) in May 2015 compared with May 2014 recorded a decline of 4.2%……Manufacturing turnover decreased by 4.2%.

Not what you want when you have a large debt burden.


We are back to a story of two halves here and it is a regular theme of the gap between the financial and real economy. There is a nuance however as this time it is a central bank rather than a private-sector one disappearing over the horizon with a swag bag of cash. There is a dizzying round-tripping of funds but the debt is being shifted onto Euro area taxpayers and for a hopefully brief period European Union ones as well as the Greeks themselves.

As the debt burden rises the average cost per unit will fall. This will help the Greek government finances at the margin but by the time we reach the Greek economy we see two major forces in the opposite direction. The first is the ongoing credit crunch where there is no finance available. The second is the latest round of austerity and in particular the VAT rises which will crunch the economy one more time. Does anybody believe that QE will be a cure for this?


21 thoughts on “How long before Greece can rely on some more help from the ECB ?

  1. The VAT rise; a cynic might wonder if it was insisted upon by a country with a competing tourist industry.
    “Rajoy said it was “essential” for Greece to follow through on the agreement …”
    I bet he did.
    What nationalities are Draghi and Constancio?

    • Hi therrawbuzzin

      An intriguing point and for those who are not aware they are Italian and Portuguese respectively.

      As to the VAT rise there are some bizarre elements as Keep Talking Greece has pointed out.

      “HA! The legislator knows much better when a plain souvlaki is a plain souvlaki! A plain souvlaki grilled on the skewer consists of plain meat cubes. It is sold with with 13% Value Added Tax. However, as of today and the new V.A.T. hikes in effect, a plain souvlaki turns into a “processed product” if salt is added. Without regret, the legislator charges another 10% V.A.T. for the simple hand move that turns the plain souvlaki cubes into a delicacy.”

      Also I note that it affects the poorer Greeks disproportionately.

      “I also think of all the low-pensioners who have a souvlaki-pitta bread as the cheapest lunch or dinner to still their hunger for just 2 euros.”

  2. Hi Shaun.

    Do I detect something of a split developing between those who see a need for structural change and those who insist that there is no alternative?

    On the one hand: Ben (I think we may need one) Bernanke, and on the other: Donald (no there isn’t) Tusk

    One more point … if the latest loan was ‘bridge financing’ then the ECB is surely to be congratulated on building the shortest bridge in the world. Depending on your point of view anything up to 90% of it seems to have already gone back out again.

    I think that the least the Troika could do is to grant Greece a VAT exemption for popcorn.

    • Hi Jim M and thanks for the links.

      It would create a potential holiday location for Forbin…

      As to Ben’s exposition I note that he implies that his policies were much better than those of the ECB. However it is an interesting idea that Greece should be judged against Euro area GDP performance and cut some slack if it is weak. Sadly as 2015 looks if not spectacular at least solid on the Euro area GDP growth front Greece would be likely to start as badly as when England go out to bat. So maybe from 2016….

  3. Shaun,
    If tax evasion was an earlier problem of the Greek economy then increasing these taxes for the majority will exacerbate it. Expect foreign bright young MBAs sent in to monitor this to no avail other than increasing local tensions!

    • Hi ChrisL

      I agree and whilst the tweet below is purely anecdotal evidence somehow I expect many in Greece will have such thoughts.

      @albertjohn Jul 18
      Latest VAT hikes in #Greece will hit many SMEs & shops. Perhaps so they can survive, I should stop checking to see if they give out receipts.

      It has hard not to have at least a little sympathy with such thoughts I think.

  4. Excellent article on paying Peter to pay Paul.

    What has not been considered by most economists and journalists has been the cost to the Greek economy by the blundering Greek Government and their misguided and failed attempts to face down their creditors. Banks being shut, customers frightened away, especially tourists and commerce stopping is not what you need when you are trying to get out of a difficult economic situation. It is like somebody stopping work and telling their creditors they are not paying them and then wondering why they are getting much poorer!

    Unfortunately, I think the Greek population were very mislead by an opportunist group of politicians, who promised them their cake and eat it and of course, not only was this not true it has left them all in a much worse position financially than if they had elected a more competent bunch of politicians. For the Greek population pistols and shooting at your feet comes to mind!

    What the cost has been to the economy has been is spelt out in this very good Reuters article:

    • “…. the Greek population were very mislead by an opportunist group of politicians, who promised them their cake and eat it…” Indeed. That’s exactly what happened c2000, when they were mis-sold the Eiro by opportunist politicians working and meeting in Brussels. The same bunch now inflicting the commercial damage you accurately describe, but mis-ascribe. Do you think the Greeks should have continued to elect the pre-Syriza crooks and cowboys? They wanted, needed, and still need somebody, many, to do different, very, very different.

    • “Misguided and failed attempts to face down their creditors????????”
      Are you saying they should have done what they were told, when they were told?
      Been seen and not heard?
      This is supposed to be sovereign government, acting on the mandate from its electorate.

      The sound of the jackboot gets louder.

    • Those “misguided and failed attempts to face down their creditors”, was a sovereign govt. acting on the very clear mandate of its electorate.

      Perhaps you also believe in the jackboot approach to “Union”?

      • Yes, they had a mandate and didn’t have the skill or convictions to see it through. I think a good word to describe them is: Opportunists.

        The easiest thing in the world is for politicians at an election is to make lots of something for nothing promises and then when elected, surprise, surprise that something for nothing is not achievable. Which is why politicians are normally grouped into such esteemed company as used car salesmen and estate agents.

        Unfortunately it is not the well paid politicians that suffer as forming a government means big pay rises and other new perks, but the deceived electorate.

    • Hi Rods,

      And need I mention that when the going got tough, Varoufakis did not have the courage of his convictions – he could have defaulted but ran away from Syriza’s referendum win. Greece can have debt relief anytime they’re prepared to default.
      Actions speak louder than words – Syriza never wanted to default, it was a crude attempt to bully German taxpayers into paying for Greeks to retire in their 50’s at 1000 euro per month.

    • “than if they had elected a more competent bunch of politicians” Yes butwhere are they to be found? Rods2, where are they to be found??

    • Hi ExpatInBG

      Yes and the Euro area establishment seem Comfortably Numb as the Greeks think about Us and Them. Of course there is always Brain Damage.

      “And if the cloud bursts, thunder in your ear
      You shout and no one seems to hear.
      And if the band you’re in starts playing different tunes
      I’ll see you on the dark side of the moon.”

  5. Hi Shaun

    I have one for the lexicon:

    European ‘Union’ – Noun: A collection of countries with no common culture, language or political outlook, forced to be together despite hundreds of years of poisonous history, destined to break apart leaving a trail of financial devastation and making each country despise the other even more than before.

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