The ECB, expected to hold fire on monetary policy at its meeting on Thursday, will likely focus instead on welcoming Greece back into the fold of fully-fledged eurozone borrowers after a bailout deal, analysts said.
European Central Bank chief Mario Draghi may well also use the lull in the bank’s unprecedented stimulus drive to remind governments that they can’t leave all the heavy lifting for Europe’s recovery to central bankers alone.
“As the ECB is presently focusing on implementing the measures decided in March, the governing council is likely to sit tight at its meeting on Thursday,” said Commerzbank economist Michael Schubert.
The ECB’s decision-making council is holding its regular policy meeting in Vienna this time round, rather than its Frankfurt home.
The most recent package of measures – the further cut in interest rates, the expansion of the asset purchase program known as quantitative easing (QE) and a new program of ultra-cheap loans for banks – was only announced a little more than two months ago.
Neither the corporate bond purchase scheme nor the new loan scheme have even started yet, Capital Economics economist Jonathan Loynes noted.
Furthermore, recent economic data do not call for more stimulus for now. “The general news on the economy since the last meeting does not seem to warrant immediate further policy action,” Loynes said.
Nevertheless, Draghi “will be careful to leave the door to further policy loosening wide open,” he said.
With no monetary easing on the cards, Greece is likely to be back on the agenda following last week’s bailout deal, ECB watchers said.
“The successful conclusion of the Greek bailout review on Tuesday suggests that the ECB will introduce a waiver and once more accept Greek government bonds as collateral for tender operations,” said Commerzbank’s Schubert.
Greek banks have been unable to take part in the ECB’s regular refinancing operations for a long time now. Normally, in these, banks receive cash in the form of very low interest loans in return for “collateral” – high-quality assets, preferably sovereign bonds, placed at the central bank as guarantee.
But given the desperate state of Greece’s finances, its sovereign bonds have been classified as “junk” for some years and are not normally eligible to be used as collateral.
Initially, the ECB granted Greek banks a special waiver to get around this problem, allowing them to use Greek sovereign bonds as collateral, as long as Athens kept to the terms of its international bailout program. But then the ECB suspended that waiver until Athens could thrash out an agreement with its international creditors on its bailout program.
Since then, Greek banks have been kept afloat via the Emergency Liquidity Assistance or ELA program, which is much more expensive.
BayernLB economist Johannes Mayr said that allowing Greek banks to participate in the ECB’s regular refinancing operations would represent a substantial cost reduction for the banks. They would also be able to participate in the new cheap-loan scheme known as TLTROs, Mayr said.
“This could have a very positive effect on credit growth and therefore on domestic demand in Greece,” he said.
The ECB might also allow Greece to take part in QE, which would bring down the very high risk premia on Greek sovereign bonds and boost the prospects of Greece being able to return to the capital markets, Mayr argued.
But that was some way off, analysts said.
Draghi “may caution that there is much still to be done by both Greece and its creditors before the markets can conclude that the country’s debts are sustainable,” said Loynes at Capital Economics.