Euro Under Fresh Pressure as ECB Suspends Greek Bond Participation in LTROs

Above: Greek finance minister Varoufakis under fresh pressure to make a deal with the EU. (C) Pound Sterling Live 2015.

“The probability of a Greek exit is clearly now higher that at any time in 2012.” - Giuseppe Maraffino at Barclays.

The euro exchange rate complex (EUR) has come under renewed selling pressure as we enter the final trading sessions of the week.

The sterling jumped a full percent higher against the euro on Wednesday on a combination of strong UK data and an important announcement at the European Central Bank (ECB).

ECB Puts Pressure on Greece to Decide on a Programme

At its February 4 non-monetary policy meeting the ECB's Governing Council decided to lift the waiver that allowed bonds issued or guaranteed by the Greek government to be eligible at the Eurosystem's refinancing operations (MRO, LTROs, TLTROs) despite their sub investment grade rating.

As a consequence, such bonds are not eligible anymore as collateral to the ECB’s regular liquidity operations, starting from the maturity of the current main refinancing operation (MRO), on 11 February 2015.

but the ECB stated that Greek banks will maintain their status of eligible counterparties for the Eurosystem's refinancing operations.

“So, they can still get ECB liquidity if they use ECB eligible collateral,” points out Giuseppe Maraffino, analyst at Barclays.

What Does this Mean for the Eurozone and the Shared Currency?

Markets sold the euro in the wake of the decision.

Maraffino explains:

“Needless to say, this is a crucial decision, which would only be taken if there are no prospects for an agreement on a programme. We believe that such decision will be taken in consultation with the key European stakeholders, including Heads of State, as it would in all likelihood precipitate a Greek exit.

“Overall, we retain the view that an agreement between the Greek government and the EU remains possible, but the probability of a Greek exit is clearly now higher that at any time in 2012. The rise of radical parties in Europe, such as Podemos in Spain, leaves not much room to EU policymakers to be lenient on Greece's requests.

Mike van Dulken, Head of Research at Accendo Markets, says the political stakes are higher than ever before for the new Greek government:

“When coupled with existing political stubbornness it has revived fears of a messy Greek conclusion with the country potentially running out of money by March.
 
“The news suggests the powers that be putting the country and its new government under more pressure to comply with bailout rules and has offset optimism yesterday as PM Tsipras and Finance Minsiter Varoufakis did the rounds with their proposals and expressed confidence in a re-financing deal.”