Greek Banks’ Haircut Rules A Key Measure of Contagion

The amount of collateral that Greek banks need to post at the European Central Bank (ECB’) will be key to watch in the bank’s policy response to the political crisis.
By Janet Du Chenne(59204)
The amount of collateral that Greek banks need to post at the European Central Bank (ECB’) will be key to watch in the bank’s policy response to the political crisis.

This, says NN Investment Partners, along with new measures to tackle liquidity issues in other parts of Europe, and to what extent will the ECB’s Emergency Liquidity Assistance remain open for Greek banks will determine the outlook for Greece, the Eurozone and financial markets.

The Greek population voted “NO” by a comfortable margin (61%-39%) on Sunday when asked whether or not to accept an offer from the county’s creditors consisting of further austerity and reform in exchange of further additional financial aid.

The ECB said on June 28 that it stands ready to safeguard stability in the Eurozone and the extension of eligible assets for its QE program into corporate bonds. Despite this statement, exact timing of ECB action remains difficult to assess and might only follow after a period of substantial market turmoil, says NN Investment Partners in a note.

A recent survey by Euroclear and Aite Group revealed that a Grexit may decrease the available collateral pool because of behavioral factors based on the market perception of potential stability of individual national economies.

The survey found the potential of a Grexit is of concern to half of the sell-side respondents and just under half of the total respondents because of its potentially destabilizing impact on the euro. Only two of the respondent firms currently hold any Greek assets and thus would be directly impacted by the change in currency and valuation of those assets, but others fear the impact of the exit on investor confidence and the region’s debt markets.

Buy-side interview respondents indicated that had already begun to move away from accepting and holding cash deposits and money market funds originating from these “peripheral” Eurozone countries, but a Grexit may spur a wider-scale flight to safety. This would entail a move away from holding Spanish, Portuguese, and Italian government bonds to holding those considered to be less at risk, such as German government bonds.

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