Greece Should Be Allowed Onto ECB's Bond-Buying List

(Bloomberg View) -- Greece and its creditors look poised to strike a deal that will allow the nation to draw down aid and avoid defaulting on its debts in July. That sounds good, but it is, in fact, just a fudge. What's needed instead is for the country to regain access to capital markets in its own right. To help make that happen, the European Central Bank should add Greek bonds to the list of securities eligible for purchase under its quantitative easing program.

QuickTake Greece's Financial Odyssey

The deal Greece is about to agree with its European partners and the International Monetary Fund is the latest in a long line of compromises that have failed to address the core issue -- that Greece's debts, now 170 percent of economic output, are so burdensome they are preventing a recovery. The IMF is right to argue that Greece needs additional debt relief on the 174 billion euros ($184 billion) it owes to the European Financial Stability Facility and the European Stability Mechanism. With elections looming this year in the Netherlands, France and Germany, however, details about that relief will probably have to wait until next year; voters don't want to hear about Greek bailouts right now. But the ECB can act swiftly to include Greek bonds in its asset purchase program.

German Chancellor Angela Merkel has told ECB President Mario Draghi that she's willing to let inclusion in his QE program be used as an incentive to persuade Greece to agree to the new deal, the Greek news service Kathimerini reported on Wednesday, without identifying the source of its information.

Draghi has made a new agreement between Greece and its lenders a condition of adding Greek debt to the 60 billion euros of bonds the central bank will buy from April, as it scales back the monthly program from 80 billion euros. Greek Prime Minister Alexis Tsipras told lawmakers last week that he's hopeful the latest bailout review can be completed by March 20, when euro-region finance ministers are scheduled to meet in Brussels.

While Greek yields have declined in recent weeks, they remain too high for the country to attempt to tap the markets. Greece's two-year borrowing cost of about 7 percent, for example, compares with just 2 percent for Italy and 1.7 percent for Spain, both of which have benefited from the support of ECB purchases:

Klaus Regling, the head of the ESM has said he expects Greece to be able to return to the markets "well before" the bailout program's scheduled end in August 2018. Yiannis Dragasakis, Greece's deputy prime minister, said on Friday that the nation could hold a test bond auction as early as this year, once the current negotiations are complete. 

ECB buying would help to drive Greek yields down to levels that would reopen capital markets to the country. The government needs to continue to reform the economy; but inclusion on the ECB's list of eligible securities would mark the start of the country's rehabilitation as a fully functioning member of the euro project rather than a failed state.

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Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

To contact the author of this story: Mark Gilbert at magilbert@bloomberg.net.

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