The ECJ has given Greece’s creditors an extra ace to play
Greece’s imminent cash shortage might be grabbing most sovereign bond watchers’ attention, but the European Court of Justice has handed its creditors an extra bargaining chip in negotiations.
With talks going down to the wire before Greece has to repay the International Monetary Fund €1.5bn at the end of the month and the talk from both sides becoming ever tougher, it’s hard to imagine anything more than a short term deal being agreed on structural reform to release much needed bail-out cash before time is up.
If that does happen — and it’s a big if — then we can expect many more months of the cycle of rising and falling hopes of a resolution being reached.
But thanks to a decision by the European Court of Justice on Tuesday, Greece’s creditors will have a stronger hand in those talks.
The ECJ ruled that the European Central Bank’s outright monetary transactions programme — first announced back in 2012 as part of the central bank’s efforts to drive down eurozone periphery yields — was legal under European Union law.
So far, so boring — the ruling barely registered on bankers’ risk barometers this week, given ECJ advocate general Cruz Villalón already opined in January that OMT was compatible, in principle, with the Treaty on the Functioning of the European Union.
But crucially, the January opinion warned that a feature of OMT whereby a beneficiary country must adhere to a financial assistance programme of the European Financial Stability Facility or European Stability Mechanism or lose OMT support could smudge the border between the ECB’s mandate for setting monetary policy and the entirely separate domain of economic policy.
However, in Tuesday’s ruling, the ECJ did not force the ECB to drop this condition. The ECJ said instead that, while OMT conditionality may have indirect effects on the implementation of economic policy objectives, “such indirect effects do not mean that such a programme must be regarded as an economic policy measure”.
Without the power of conditionality, it would not be hard to imagine a situation where Greece has exited its bail-out, regained access to the capital markets — a far-off possibility, but don’t forget the country sold two bonds a year ago — then the ruling Syriza party decides to renege on its reforms. After all, it is, and always will be, an anti-austerity party.
In this scenario Greece would be able to demand OMT assistance with seemingly no responsibility on it to take measures to ensure it doesn't need future ones. In short, it has a free option.
That may seem a long way off but if a short term solution can be found to Greece’s looming redemption pile, its European creditors will be in a much stronger bargaining position in the longer term thanks to the ECJ.
And with Tuesday’s ruling strengthening Europe’s hand in any future negotiations, the many — largely German — opponents of OMT might start thinking it’s not such a bad idea after all.