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ECB President 'Corners' Next Greek Gov't Tying QE to Good Behavior

DRAGHI9_533_355The European Central Bank set conditions for Greece in order to access the announced bond-buying program. The next Greek government will have no access to the Quantitative Easing program for at least six months unless they heed the demands of official creditors.
According to a Bloomberg report, the ECB decision locks Greece out of the QE program until policy questions raised by the vote have been resolved. Forecasts show the SYRIZA opposition party winning the election on a platform of anti-austerity and the promise to achieve a big debt writeoff. The proclamations of SYRIZA leader Alexis Tsipras that Greece will not heed to the tough conditions of the bailout program have raised concern among European Union partners over the country’s exit from the euro zone.
When the 1.1 trillion euros QE program was first announced, SYRIZA rushed to comment that it was, “an important decision that will be utilized by the next Greek government for the country’s benefit.”
However, Draghi said on Thursday in Frankfurt that Greece will not be eligible for the QE program until at least July because of limits on how much debt the central bank buys from a single issuer. Greece must complete the stalled review of its current bailout program, as purchases from program countries will be suspended during such assessments, according to a statement on the ECB’s website.
“This is a carrot to SYRIZA to reach an agreement with the troika,” commented Athanasios Vamvakidis, head of G-10 foreign exchange strategy at Bank of America Merrill Lynch. “The ECB will buy Greek bonds in July if there is a deal. I think it is the best Greece could hope for.”
The SYRIZA chief has pledged to persuade the ECB and Greece’s European partners to write down the value of the Greek debt holdings so that he can boost public spending and create jobs. He said this week that excluding Greece from the QE program would be punishing a country that already suffered years of austerity.
Greece’s current financial support program expires at the end of February. There is a 7.2 billion euro tranche pending, but Athens will receive that only if they pass the last bailout review. If there is no further aid, the government will run out of money, two officials said this month.

According to the Bloomberg report, Draghi said the ECB won’t own more than 33 percent of the debt from a single issuer. That keeps Greece on the sidelines at least until it has made a July repayment of debt the central bank already owns, he said. Countries governed by bailout agreements will face additional criteria, he added.

“We don’t have any special rule for Greece, we have basically rules that apply to everybody,” Draghi said. “There are obviously some conditions before we can buy Greek bonds.” After the announcement, both sides claimed the ECB policy strengthened their position.
The yield on Greek 10-year bonds, which last week rose above 10 percent, on Thursday fell to 8.97 percent. The yield touched 5.52 percent on September 8, just before the start of the review that the government and the troika were unable to complete in December 2014.
Since 2010, when the bailout program commenced, the ECB has accepted Greece’s junk-rated government debt and state-backed securities as collateral in its refinancing operations as long as the Greek administration complies with austerity measures and reform pledges in its bailout agreements. That agreement is also in danger by the prospect of a SYRIZA victory on Sunday night.

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