Bloomberg: Draghi corners Tsipras by attaching strings to stimulus

draghiThe European Central Bank set limits on accessing its bond-buying program that will exclude Greece for at least six months, raising pressure on whichever party wins Jan. 25 elections to heed the demands of official creditors.

The ECB decision locks Greece out of the quantitative easing program until policy questions raised by the vote have been resolved. Foremost among them is the strategy of Alexis Tsipras, whose Syriza party is leading Prime Minister Antonis Samaras’s New Democracy in polls after he pledged to wring substantial concessions from the so-called troika of creditors.

Greece will be ineligible for the ECB’s 1.1 trillion-euro ($1.3 trillion) program until at least July because of limits on how much debt the central bank buys from a single issuer, President Mario Draghi said Thursday in Frankfurt. Greece must also complete a stalled review of its current bailout, as purchases from program countries will be suspended during such assessments, according to a statement on the ECB’s website.

“This is a carrot to Syriza to reach an agreement with the troika,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy at Bank of America Merrill Lynch. “The ECB will buy Greek bonds in July if there is a deal. I think it is the best Greece could hope for.”

Tsipras has pledged to persuade the ECB and the euro region to write down the value of their Greek debt holdings to let him ramp up public spending and create jobs. He said this week that excluding Greece from the QE program would be punishing a country that already suffered years of austerity.

The country’s existing program of financial support expires at the end of February. The government will run out of money by June without further aid, two officials said this month.

Draghi said the ECB won’t own more than 33 percent of the debt from a single issuer. That keeps Greece on the sidelines at least until it has made a July repayment of debt the central bank already owns, he said.

“We don’t have any special rule for Greece — we have basically rules that apply to everybody,” Draghi said. “There are obviously some conditions before we can buy Greek bonds.”

The central bank’s purchases will be focused on governments with an investment-grade credit rating and countries governed by bailout agreements will face additional criteria, Draghi said.

The yield on Greek 10-year bonds, which last week rose above 10 percent for the first time since October 2013, fell 38 basis points Thursday to 8.99 percent at 6:23 p.m. Athens time. The yield touched 5.52 percent on Sept. 8, just before the start of the review which the government and the troika were unable to complete last month.

Since 2010, the ECB has accepted Greece’s junk-rated government debt and state-backed securities as collateral in its refinancing operations as long as the administration complies with austerity measures and reform pledges in its bailout agreements. That agreement is also jeopardized by the prospect of a Syriza victory.

“The ECB has to make sure that its policy works,” Christian Schulz, senior European economist at Berenberg Bank, said before Draghi’s statement. “It’s not necessary to buy Greek bonds for it to work. The additional quantitative effects of buying Greek bonds can also be achieved by buying more Italian, Portuguese or German bonds.”