Greek economy’s vaccines: QE and cash buffer

Greece’s biggest weapon against the pandemic-induced crisis is none other than its own cash reserves, which can both finance its support measures and signal to the market that the country has no liquidity problems. It also has a great ally in the European Central Bank and its bond-buying program, but analysts who spoke to Kathimerini agree that the cash safety cushion is making the difference thanks to Athens’ wise use of it.

“The ECB is indeed Greece’s (and not only Greece’s) main buffer during the pandemic crisis,” says Ioannis Sokos, Director of Fixed Income Research at Deutsche Bank.

“In a year where Greece had to increase its fiscal spending to support the economy, hence leading to larger borrowing needs which could have depleted Greece’s cash buffer, the amount of ECB purchases managed to exceed Greek government bond issuance volumes,” he comments.

“This exerts downward pressures on yields, and allowed Greece not only to protect its precious cash buffer, but also to borrow at very favorable rates and at relatively long maturities which minimize the negative impact of this excess fiscal spending to the debt sustainability of Greek debt. So, there is no doubt on whether the ECB, and of course the EU Recovery Fund, have both been the main buffers for Greece during this pandemic crisis,” Sokos tells Kathimerini.

Fabio Balboni, Director and Senior European Economist at HSBC, says one should not see the ECB as the only, or even the main reason for Greece’s strong market performance so far: “I see it more of a case of Greece having done it for itself. What the ECB has done with PEPP is to help Greece – and all other eurozone countries – offset the consequences of the pandemic in terms of additional issuance needs.”

He points out that “the right calculation to do here would be to look not at issuance, but at the turnaround in the deficit level. Greece went from a small fiscal surplus last year to a fiscal deficit of around 10% of GDP (per HSBC estimates). That’s a turnaround by 12% of GDP, or 20 billion euros. So the ECB did nothing more and nothing less than offset that – pretty much as it did for all other eurozone countries.”

“But the key is that Greece had already put itself in a strong position from a markets perspective given its strong commitment to reforms, privatizations, ability to attract foreign direct investment which led to several ratings upgrades in the previous years and which are still reflected in the most recent upgrade by Moody’s. Plus, they contributed to a changed perception of Greece in Europe,” recounts.

“The ECB’s €18 billion of Greek government bond purchases are dwarfed by the €32 billion it managed to obtain from the Next Generation EU recovery fund, which added to EU structural and agricultural funds mean Greece is set to receive €7 billion from the EU over the next seven years. To counter to that, obviously Greece has been hit disproportionately hard by the crisis due to its large exposure to tourism, but history shows that countries which get pandemics under control faster also stand a better chance to fully recover,” argues Balboni to Kathimerini.