The European Central Bank announced that starting next week it will no longer accept Greek government debt as collateral. This is not necessarily a liquidity disaster for Greek banks which are not particularly reliant on sovereign debt collateral with the ECB and have access to other European cash for funding.
It might however prompt skittish depositors to withdraw cash which could quickly become a problem for the banking system if not staunched.
The news certainly unsettled the markets. The euro promptly fell close to a figure and a half, from 1.1447 to 1.1316. The Dow gave up all of its 100+ gains closing 6 points higher and the yield on the 10 year Treasury lost 5 basis points to 1.75 percent. It had traded as high as 1.84 percent earlier in the day, 21 points above its January 30th low of 1.64 percent.
The newly elected Greek government of Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis want the nation’s European creditors to forgive a portion of Greece’s sovereign debt, maintaining that the Mediterranean country will never be able to repay it.
The Europeans are insisting that Greece honor the terms of the bailouts agreement with the EU Commission, the ECB and the IMF. The ECB, not unexpectedly has sided with its European partners. If the Greek government does not renew its bailout agreements, the ECB will not accept its debt as collateral.
The Greek drama is now political brinkmanship. Greece has elected a government committed to reducing its debt and ending the austerity imposed by the terms of its European creditors. Ending austerity abrogates its bailout agreements something its creditors say they will not accept. Compromise is not impossible but the more strident the positions and the longer the conflict drag on the more difficult it becomes.
The end result of intransigence could be the Greek departure for the euro, a denouement neither side says it wants.
Chief Market Strategist
WorldWideMarkets Online Trading