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(Kitco News) - The European Central Bank (ECB) has taken a strong stand in potential negotiations with Greece as the country tries to renegotiate the repayment of its bailout loans and austerity measures.
Late Wednesday, the ECB pulled the plug on Greek funding, noting it would no longer accept Greek government bonds, or bonds it guaranteed, as collateral starting February 11.
The central bank says it’s skeptical a new deal can be struck when the Greek assistance program wraps at the end of the month.
Greek stocks and bonds are seeing a brutal drop Thursday as a result of the news. Big losses shook the country’s banking sector, where shares in Piraeus Bank SA, National Bank of Greece SA, Alpha Bank AE and Eurobank Ergasias SA were all down sharply; the Athens Stock Exchange FTSE Banks Index dropped by as much as 22.6% at its open.
In a research note dedicated to the ECB announcement, analysts at Brown Brothers Harriman (BBH) explain the impact of the decision. “As long as Greece was getting assistance, the ECB was willing to waive its rule against accepting below investment grade collateral. It ended that waiver,” BBH says.
So what will Greece do for funding? BBH explains that Greek banks can borrow from the ECB, but they cannot use the government paper as collateral. “There is a facility called Emergency Lending Assistance (ELA). It is through the national central bank, with permission from the ECB. The risk stays with the national central bank and is not shared with the Eurosystem.”
As for the next steps, BBH says it is really all about negotiations. “The risks that Greece is pushed out of EMU have increased, but there still seems to be room for a compromise. Even if one disagrees with the new Greek government, it is more likely than the past governments to improve tax collection, break the rent-seeking behavior of the economic elite and institute pro-growth reforms.”
BBH also notes that there could be strategic reasons for Greece to remain in the EMU. If the country were to leave, it could find international help elsewhere. “Russia has already offered it. China may also maybe interested in Greek ports (potential naval bases) and offshore gas and oil fields. Greece is a NATO member,” BBH says.
By Daniela Cambone of Kitco News; newsfeedback@kitco.com
Follow me on Twitter @DanielaCambone