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FT.com / Columnists / GillianTett - ECB keeps lid on Greek bond data

Somewhere in the bowels of the mighty European Central Bank, there is a number that many investors would give a lot of euros to see.

It refers to the volume of Greek government bonds that are now sitting in the ECB's coffers, after being lodged there by European banks through central bank repo operations.
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secondary markets that have been surprisingly thin in recent days. For notwithstanding all the recent attention on sovereign debt, traders say the liquidity of secondary Greek bond markets - together with other countries such as Portugal - has recently been very thin.
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I suspect another reason for that illiquidity is the ECB itself. At present it is estimated that Greek banks hold up to €37bn ($50bn) of the outstanding €270bn-odd stock of Greek government bonds and bills. German banks, such as the Landesbank, are thought to hold a slightly lower amount, while French banks also have a significant chunk of Greek bonds.

It is a fair guess that many, if not most, of those bonds are now with the ECB. After all, what the ECB's repo operations essentially do is let banks turn a risky asset (ie Greek bond) into something safer (euros). And that, in turn, means that banks now have fewer Greek bonds to lend to hedge funds, or other traders.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 26th, 2010 at 05:32:17 AM EST
[ Parent ]
That the secondary market is thin means that prices can be more volatile than justified by the fundamentals because they are determined by few transactions.

If the Greek debt not held by the Eurosystem is a small fraction of the total debt outstanding, it also means it would be very cheap for the ECB to set a floor to the price in the secondary market, since there's very little (relatively speaking) left for the ECB to buy.

But if most of the Greek debt has been swapped through repos already, it means the ECB's gunpowder is all wet from the 2007-9 quantitative easing exercise.

On the other hand, repos are repurchase agreements: the commercial banks that swapped those Greek bonds in the last 2 years also agreed to buy them back from the ECB at a price that was fixed then. So, if the price of Greek debt collapses and the commercial banks are forced to repurchase them at the old price, the commercial banks make a loss.

So it is possible that all of the CDS purchased in the part few weeks have been by institutions that don't hold greek debt, but that know that they have an obligation to repurchase it from the ECB soon, at a relatively expensive price.

In any case, what the ECB did with these repos (if that's what's going on) was not in the secondary market, but through the discount window.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 26th, 2010 at 05:49:14 AM EST
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