ECB Insight: Post-PEPP APP Purchases of Greece’s Sovereign Debt a Very Open Question

23 November 2021

By David Barwick – Frankfurt (Econostream) – Anyone ready to succumb to the impression that post-pandemic inclusion of Greece in the European Central Bank’s asset purchase programme (APP) is a done deal might want to consider that central bankers are as familiar as everyone else with the old dictum not to say anything if one has nothing nice to say.

In other words, policymakers disposed in favour of Greece are more inclined to indicate as much, while those with doubts – let alone those clearly opposed – tend to reticence or a repetition of rather noncommittal talking points.

Consider for example Central Bank of Malta Governor Edward Scicluna’s affirmation in an interview with Econostream last month that he would view with some sympathy Greece’s desire to see the ECB continue to buy its sovereign debt.

Admittedly, Scicluna conceded that ‘there will definitely be mixed views’ on the issue, and also said that he would want first to be made aware ‘of the negative implications, if any, and of the risks the decision might involve.’

But the lingering impression, skewed though it may be, is that of ‘some sympathy’ for Greece. Unsurprisingly, Banca d’Italia Governor Ignazio Visco has also been understood to support Greek aspirations, while completely unsurprisingly, Bank of Greece Governor Yannis Stournaras shows every indication of expecting a positive outcome on this question.

Getting any of their peers to publicly say ‘no’ is a good deal tougher, which leads to the premature belief that post-pandemic emergency purchase programme (PEPP) support for Greece is some sort of juggernaut.

It’s not.

Observers might want to think back to the response given by ECB Chief Economist Philip Lane when asked in an August interview very straightforwardly whether it was ‘vital … to keep Greece in QE’.

Lane’s answer boiled down to three points: the purchases have a positive impact wider than the effect on any individual country; Greece’s inclusion was warranted by the risk ‘of a crisis phase’; and reinvestment means the ECB will in any case remain present in the Greek bond market.

Agreed, it would have been too soon for Lane to say ‘yes’ even if that’s what he was thinking. But it would take a vivid imagination to find anything in his answer to corroborate the idea that Greek bonds are destined to go on being scooped up by the Eurosystem.

The same goes for Isabel Schnabel’s interview earlier today, in which she similarly pointed out, as if in consolation, that ‘there will still be a significant market presence under the PEPP due to reinvestment’ when asked about Greek inclusion under the APP. ‘It will have to be discussed whether that is sufficient', she added.

And that’s about as negative as European monetary authorities want to get on the matter on the record.

When they speak on background, it is evident that there is indeed some support for Athens. ‘If it is deemed that sufficient progress has been made, I would be happy if the Governing Council sees this decision from a position of generosity towards Greece’, one central banker told Econostream. ‘That would make sense to me.’

But it is just as evident that the overall attitude is more nuanced than that. As a central banker in the ‘no’ camp stated emphatically, ‘the Governing Council will be divided on that idea. There will be quite substantial opposition to that.’

Observing that Greece was faced with ‘quite a huge amount of debt’, this person also worried aloud that ‘even with the slightest crisis, Greece can get to a very dangerous spiral if there is no change in policy or no debt reduction. From that perspective, I’m worried about the situation there.’

But inclusion of Greek debt in the ECB’s APP or another asset purchase programme was not the answer, he said, because ‘that would just mean that nothing will happen.’

Ideally, there would be something along the lines of the ECB’s as-yet unused OMT programme, he said, where sovereign debt purchases would be attached to conditions. ‘Because otherwise, if you do this automatically every crisis, that is unsustainable’, he said. ‘Somebody will file a legal case.’

The idea of some arrangement involving conditionality met with approval from various central bankers Econostream spoke to, though one person objected that ‘avoiding fragmentation of the capital markets in the euro area … has nothing to do with conditionality.’

However, even this person agreed that there could be room for something of the sort, ‘attached to conditionality for countries that are facing various difficulties.’

To be sure, there were doubts expressed as to whether anything with conditionality stood much chance of being called on anyway, as any Greek government that accepted conditionality in order to participate in anything like the OMT would probably be courting political suicide.

At the heart of the problem with solutions that simply prolong the current Greek debt purchases without the justification of the crisis is the fact that they create a dangerous precedent. The ECB is not likely to kid itself that a decision to include Greek-debt in a post-PEPP purchase programme can be made in some sort of Greece-specific vacuum.

Rather, an important aspect of considering the issue will be weighing the implications of any decision for unanticipated circumstances in an indeterminate future, and whether the ECB might as a result inadvertently find itself at the front line of issues whose resolution is best left to other institutions.

This is already cause for concern, which is why Bundesbank President Jens Weidmann on Friday complained of the public impression ‘that the central banks were always ready to step into the breach for other policy areas, if push came to shove’ and that ‘the demands placed on central banks have grown from crisis to crisis.’

Such scepticism is well-founded, as post-pandemic ECB largess toward Athens would be a decision with potentially momentous implications. How, for example, would the ECB ever again invoke its collateral policies as a reason not to purchase a struggling member country’s debt? More generally, how would the ECB credibly claim that something involving fiscal risks is a task for finance ministries, not the central bank?

These and other issues will need addressing by the legal experts within the Eurotower, whose analyses and clarifications will not be guided by sympathy.

Awkward questions from dubious Council members are not hard to imagine. As one central banker who spoke to Econostream said, ‘You can’t put everything on the shoulders of monetary policy with a no-monetary-financing clause, because if you buy a lot of stuff, when will be the right time to put it back on the market? Probably not for very, very long. So, is that monetary financing? It would be nice to have clearer answers to such questions.’

All members of the Governing Council will be made amply aware before a decision is reached that an intervention would be at the peril of miring the ECB in more such interventions, not to mention inviting legal challenges of the sort the ECB has already had to contend with and would prefer to avoid. Initial, instinctive sympathy on the part of some towards Greece may give way to a more prudent perspective.

If this is the case, then the ECB may simply stand by its supposed belief in its own ability to rise to any occasion as required, and Greek bonds would be excluded again for the moment. It wouldn’t cost much for the ECB to soften the blow with a statement reminding markets of its determination to safeguard the integrity of the monetary policy transmission mechanism in all parts of the euro area.

There are, it must be noted, several factors operating in Greece’s favour. One is the improvement in recent months in the country’s credit rating. Another is the fact that there are various Governing Council members from other highly indebted countries who, as one central banker said, will see support for Greece as something of an ‘insurance mechanism’.

In addition, nearly a quarter of the Council’s current members, including ECB President Christine Lagarde and Vice President Luis de Guindos, were previously responsible for the fiscal affairs of their respective country, and Eurozone finance ministers have had a habit of looking to the ECB as the institution of choice to solve the euro area’s problems.

A middle ground might involve the explicit creation of an instrument with Greece in mind to be kept in reserve for an extreme situation, along with the hope that markets’ mere awareness of its availability might be enough to keep sufficient order for its deployment never to be needed.

Of all the possible solutions, however, continued unconditional ECB purchases of Greek sovereign debt seems the one least appropriate for a central bank that is cautious about any actions that would overstep the boundaries of its limited mandate.

ECB observers should not underestimate Council members’ cognizance of this, even if public silence or a studied neutrality may be the preferred option in the absence of anything nice to say.