Piraeus Bank SA rolled over 4.5 billion euros ($4.9 billion) of bonds issued to itself and used as collateral for emergency loans from the Bank of Greece as the nation’s lenders struggle to survive.
The three-month notes, which are guaranteed by the Greek government, replace securities issued in April, according to data compiled by Bloomberg. Greek banks need to renew another 12 billion euros of similar debt this month, the data show.
Such “phantom bonds” are designed to get around the European Central Bank’s emergency lending rules and amount to a “hidden bailout” by taxpayers, former Finance Minister Yanis Varoufakis wrote on his blog last year. The ECB tightened collateral conditions on Monday, making it more difficult for Greek banks to access the funds that have kept them alive.
“It’s perfectly legal but tests the bounds of logic,” said Ioannis Glinavos, a senior lecturer at the University of Westminister in London. “It’s circular financing, artificially inflating the ratings so it can draw liquidity out of the euro system.”
While the risk of emergency liquidity assistance is nominally borne by the national central bank that provides it, the Frankfurt-based ECB has broad discretion over the terms.
The odd thing about this action is that this form of financing for guaranteed bonds should not be available anymore. I had written on this blog in April
The Governing Council of the European Central Bank (ECB) has adopted Decision ECB/2013/6, which prevents, as of 1 March 2015, the use as collateral in Eurosystem monetary policy operations of uncovered government-guaranteed bank bonds that have been issued by the counterparty itself or an entity closely linked to that counterparty. As of that date, the Eurosystem will also no longer accept covered bonds issued by the counterparty where the asset pool contains uncovered government-guaranteed bank bonds also issued by that counterparty or an entity closely linked to that counterparty. This Decision, which aims to ensure the equal treatment of counterparties in Eurosystem monetary policy operations (supposedly!) and simplify the relevant legal provisions, follows the measures implemented on 3 July 2012, which limited counterparties’ use of uncovered government-guaranteed bank bonds that they themselves have issued. This decision has been implemented by means of the recasting of Guideline ECB/2012/18. In the interests of clarity and simplicity, the recast Guideline ECB/2013/4 now also includes the provisions of other existing legal acts on temporary measures (namely Decisions ECB/2011/4, ECB/2011/10, ECB/2012/32 and ECB/2012/34).
ECB/2013/6 was repealed as there is now consolidated legislation in ECB/2014/60 (see here). The problem is that it is not clear whether the new consolidated Guidelines actually allow self-issued uncovered state-guaranteed bank bonds to be used as collateral for drawing ELA through the BoG. It seems to depend on the credit rating of the guarantor, which is murky in the case of Greece to say the least.
Some further investigation is in order I reckon…