Greek markets revive after ECB agrees lifeline

Greek markets recovered from a sharp sell-off yesterday after the European Central Bank (ECB) agreed to a local lifeline for Greek banks, having earlier said it would stop accepting Greece's bonds in return for funding them.

The ECB’s abrupt announcement that it will stop funding the country’s banks from February 11th is a big setback for the Greek government’s attempt to negotiate a new debt deal with its euro zone peers. But an initial bout of heavy selling in Greek assets eased after the ECB agreed to allow the Greek central bank to offer lenders emergency funding of up to €60 billion, an amount seen as enough to cushion a major run.

"The ECB are not politicians, and they won't want to pull the trigger on anything that would force Greece to leave the euro," said Rabobank strategist Lyn Graham-Taylor.

Foretaste

In a foretaste of the probable consequences of a prolonged deadlock between Athens and other EU capitals, short-term Greek bond yields shot up more than 300 basis points to nearly 20 per cent before pulling back to 17.3 per cent. Benchmark 10-year bond yields rose almost a full point to 10.87 per cent, but were unchanged on the day at around 10 per cent.

Banking stocks were off their lows, but remained 10 per cent down on the day.

“As severe as the ECB announcement appears, it likely represents the central bank’s opening gambit in what will be several rounds of negotiations with Athens and Berlin over the next four months,” said City Index chief global strategist Ashraf Laidi.

Openness to compromise

Greek stocks were still above lows hit in the aftermath of Syriza’s election victory less than two weeks ago, as investors perceive the left-wing party’s leaders to have shown some openness to compromise as they tour Europe in search of allies.

The Greek central bank will have to provide lenders with tens of billions of euro of emergency liquidity assistance in coming weeks, a step it takes at its own risk, ringfencing their funding problems from the rest of the euro zone.

Shares in National Bank of Greece and Bank of Piraeus both plunged more 13 per cent on Thursday. - Reuters