December 12, 2014 / 2:36 AM / in 5 years

'Grexit' threat could complicate ECB quantitative easing: James Saft

(Reuters) - The return of the idea of a Greek euro exit, as boogeyman or genuine threat, comes at a particularly difficult time, dangerously complicating the already fraught advent of full-scale QE in the euro zone.

Greece's Prime Minister and leader of ruling conservative New Democracy party Antonis Samaras addresses his parliamentary group in Athens December 11, 2014. REUTERS/Alkis Konstantinidis

A parliamentary vote, set to begin next week, to replace the Greek president may trigger general elections in the new year, elections which the anti-bailout party Syriza could well win.

“We shed blood to take the word ‘Grexit’ away from the mouth of foreigners, and Syriza is bringing this word back to their mouths,” Prime Minister Antonis Samaras said on Thursday, using once more the highly emotive term for a Greek parting of ways with the euro project.

The very idea, much less its invocation by the prime minister, panics Greek markets, which have seen equities lose more than a fifth of their value in three days and a spike in 10-year government bond yields above 9 percent.

There are very good reasons for this, though much has changed since the height of Greece’s crisis.

Even beyond Greece’s own grave difficulties, should Syriza win an election, most likely to be held, if needed, in January or early February, it will shortly enter into negotiations, if not conflict, with the Troika of the European Commission, the International Monetary Fund and the European Central Bank over the terms of the bailout.

That doesn’t have, by any stretch, to end with a euro lineup change, but by its very nature the term and idea will be batted about, with predictable results.

Almost no matter how you slice it, Greece, with a quarter of its population unemployed and having lost a quarter of its economic output, is poorly positioned to shoulder its debt load.

While Syriza has backed off from euro exit as a position, it did in May call for a writeoff of almost a third of Greek debt, and in September for euro zone debt relief for the country, perhaps by replacing existing debt with new bonds linked to GDP growth.

First off in any such negotiation the threat of default or of an exit are tactics which will be used. This will have predictable results on global capital markets, not simply making things tougher for Greece but potentially bleeding over into the bonds of other weaker euro zone member countries.


If, of course, Greece’s debt load is to be lightened in some way, the existing holders of its debt will have to decide who takes the loss that will represent.

Step back then and consider the situation of the ECB. Facing a quite real threat of deflation, the ECB took pains at its last meeting to stress that it “intends” to expand its balance sheet to 3 trillion euros and that it would “reassess” monetary policy in the new year. Further, despite widely reported German objections to outright government bond buying, ECB President Mario Draghi said he did not require “unanimity” to go ahead with QE.

Draghi took pains last Thursday to both justify quantitative easing and give observers reason to believe it was coming. Not only did the ECB upgrade to “intends” to expand its balance sheet to 3 trillion euros, as against its earlier “expecting” this would happen, but it slashed forecasts for growth and inflation.

“Early next year the governing council will reassess the monetary stimulus achieved and the outlook for price developments,” Draghi said at the post-announcement news conference. “We will also evaluate oil price developments.”

Despite widely reported German objections to QE, Draghi went on to imply that it would happen anyway.

“Do we need to have unanimity to proceed on QE or can we have a majority? I think we don’t need unanimity,” he said.

One German objection to this type of QE is that it breaks a ban on outright financing of member states by the ECB.

This is where things get complicated. For Greece to get a better deal out of the Troika, the ECB is going to have to sign off on some form of debt relief, be it longer term or lower interest rate. That means that the ECB will take a loss. It also opens itself up to yet another charge of direct financing, though again, it is far from clear that this is what a restructuring including the ECB would represent.

In other words should the Troika do something for Greece, the opponents of QE will have more ammunition.

The first part of the Greek parliamentary vote is next week, but it won’t likely be concluded until just before the New Year. The ECB meets once in January, just maybe before any Greek general election could be held.

If the ECB does want to get on with QE, it may have new reason to hurry.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at and find more columns at

Editing by James Dalgleish

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