The Governor of the Bank of Greece, Giannis Stournaras, who spoke at a Regular Meeting of its Shareholders, sees the creation of a capital “cushion” for the exit of Greece from the memoranda. As he said, “a financial safety net has to be created that will convince of the country’s capability to face potential economic shocks, which make the financing cost intolerable.” According to Stournaras, “such a safety net is the predicted ‘liquidity reserve’, which allows to avoid recourse to markets in times of instability and increased refinancing costs,” while he also stressed that the proactive credit line should not be demonised either.
Beyond that, he stressed that the successful completion of the third programme in August 2018 will mark the end of a long economic adjustment period, allow for a return to regularity and can, under certain conditions, be a starting point for rapid and sustainable growth.
Smooth exit to markets
After the end of the programme, Greece will have to secure the funds needed to meet its financing needs by resorting to international financial markets in sustainable conditions. As has already been mentioned, the consolidation of trust is the main and essential prerequisite for this to happen. At the same time, however, a financial safety net should be created to convince -as has been mentioned above- that the country may face potential economic shocks, which would render the financing cost intolerable.
Stournaras believes that such safety net is the predicted “liquidity reserve”, which allows avoiding recourse to markets in times of instability and increased cost re-financing. But the upheavals, like the recent one, seem to have a greater impact on countries with a weak credit rating and a less robust economy, which saw their government bond yields rise significantly. Consequently, under the current uncertain circumstances, leaving the Greek government in the markets, although it is imperative for the country to return to regularity, must be made with cautious steps.
International experience has shown that the exit test in the markets to create a secure liquidity reserve before the end of the programme creates a climate of confidence and paves the way the exit of the country from the programme. However, a preventive support programme should be considered in addition.
He argues that the possibility of using a preventative support programme, especially if financial market conditions favour this, should not be dramatised, since European mechanisms were created to be used when needed. The existence of such a preventative support framework is estimated to be supportive of the Greek economy by reducing borrowing costs as it will provide security for the access of the Greek State and the banks to funding after the end of the programme in August 2018.
The European Stability Mechanism (ESM) preventive credit line would make these resources available, without the need -from the outset- for them to be drawn. On the contrary, the accumulation of cash reserves directly implies additional borrowing, which adds to the annual debt servicing costs.
In addition, this preventative support framework ensures that the Greek government bonds’ waiver is maintained in order to be used as collateral in the Eurosystem’s monetary policy operations until Greece acquires an investment credit rating. Moreover, in this case, the systemic reserve for systemic banks is expected to be available even beyond August 2018.
Maintaining the waiver combined with debt sustainability measures will allow the purchase of Greek government bonds by the European Central Bank (ECB) as part of the government securities purchase programme, either in its normal duration or in the reinvestment period, affecting (lowering) the cost of borrowing by the Greek government…/IBNA