With a country in disarray and that has defaulted not only once but twice during the last 24 months, one might ask oneself how on earth T-bill funding is still possible for Greece. Yesterday Greece again had a successful 6 month T-bill auction, with a steady yield and 1.70 bid-cover ratio, similar to previous auctions. According to Reuters:
Greece sold 1.625 billion euros ($2.09 billion) of six-month T-bills on Tuesday to roll over a maturing issue, the country’s debt agency (PDMA) said.
The T-bills were priced to yield 4.2 percent, unchanged from a previous June auction. The sale’s bid-cover ratio was 1.70, the same as in the previous auction.
The amount raised included 375 million euros in non-competitive bids.
Monthly T-bill sales are Greece’s sole remaining source of market funding. [Reuters]
In order to understand this, we need to look at the structure of the Greek bank bail-out, as well as ECBs willingness to continue to carry this “financing” through flat out money-printing. But hidden of course! We do have elections coming up in core EMU-countries, so don’t tell them how their goods can flow to a bankrupt country and effectively get written off the moment it leaves the factories in the north.
Ok, so here is how this all plays out:
Do you remember the old days? Those when Greece – for some odd reason was a A-rated country – and just like the other kids in the Eurozone was all risk-free? Good times! Short on bank liquidity? No problem. Get a government guarantee on your bonds (implicit A-rating in the case of Greece), run to the ECB and pull on the main refinancing operation (MRO) or if that’s maxed out, the marginal lending facility (MLF).
The problem really started when the Government of Greece went below any type of investment grade rating and Greek Government bonds were no longer good as collateral at the ECB. Suddenly the lender of last resort disappeared and a credit crunch were imminent. Enter the deus ex mahina of the Central Bank of Greece with its Emergency Lending Assistance (ELA).
ELA is a program aimed at supporting a bank inside the Euro system that has been cut off from the usual funding programs at the ECB. In the case of Greece, national bankruptcy caused the ECB model of lending against collateral to break down, as opposed to other central banks with more leeway, id est quantitative easing (QE). In the beautiful world of ELA, one can continue to live on borrowed time, by bankrolling the repsective government through the triangle that is the ECB in Frankfurt, national commercial banks in cahoots with the Government debt office and third the National Central Bank (NCB).
This is how it works:
1. The ECB board of directors will vote with 2/3 majority to approve ELA to the National Central Bank (NCB).
2. Commercial Banks will issue unsecured debt that will basically be bought by one another, in an almost swap-like agreement. The government will give these bills a government guarantee, effectively making them “good” collateral at the NCB.
3. Commercial bank`s take their government-guaranteed bills to the NCB, post them as collateral and in return get money from the ELA facility.
4. Government issues T-bills that are immediately bought by the commercial banks – and voila money flows into the Government’s coffers.
ECB is through its Emergency Lending Assistance enabling a “QE”-like source of funding for distressed governments in the EZ periphery. This is also the only existing ECB funding program that is unsterilized, and thus adding liquidity to the market without a similar contraction. In essence they are enabling continued consumption of capital in economies desperate to scramble together real savings in order to get growth back on track.