Sunday 21 January 2018

ECB's ban on Greek bonds hits Europe, Greece slumps

German central Bank president Jens Weidmann with ECB president Jean-Claude Trichet. Photo: Getty Images
German central Bank president Jens Weidmann with ECB president Jean-Claude Trichet. Photo: Getty Images

A European Central Bank decision to strike Greek bonds off its list of accepted collateral rattled European markets, sending shares into reverse and investors back into safe-haven German bonds.

As pressure on Greece's new anti-austerity government ratcheted up, the pan-European FTSEurofirst .FTEU3 index dropped 0.4 percent. The euro EUR= tumbled overnight.

Greek bank shares fell 15 percent .FTATBNK, leading a 6 percent decline by the Athens stock market .ATG. Yields on 3- and 5-year Greek debt <0#GRTSY=TWEB> climbed 220 and 190 basis point respectively.

The ECB move means the Greek central bank will have to provide Greek banks with billions of euros of emergency funding. Assuming the ECB Governing Council approves the decision, it marks the euro zone central bank's most serious response yet to Greece's efforts to rewrite its aid-for-reform agreements.

The head of Germany's Bundesbank, Jens Weidmann, said the ECB needed to be strict in allowing emergency funding for Greek banks.

"(Emergency liquidity assistance) should only be awarded for the short term and to solvent banks," Weidmann told the business newspaper Boersen Zeitung. "I am of the view that we should apply strict standards with ELA. If that should have consequences for financial stability, then politicians must live up to their responsibilities."

The euro EUR= dropped after the ECB decision late on Wednesday. It has recovered trade at $1.1372 EUR= by 0915 GMT (04:15 a.m. EST), up 0.25 percent from late U.S. trade

It got a lift from German industrial orders, which reached their highest since April 2008. That suggested the euro's 20 percent drop over the past six months was starting to benefit German exporters.

Oil markets LCOc1CLc1 steadied after dropping nearly 10 percent in the previous session, ending a four-day rally. Oil slumped after the United States reported its stockpile of crude had grown by 6.3 million barrels last week to a record-high 413.06 million barrels, the fourth straight weekly gain.

ASIA WORRIES

The ECB's ban on Greek bonds worried Asian stock markets. Japan's Nikkei .N225 fell 1 percent after rising 2 percent on Wednesday. Shares in South Korea, Malaysia and Singapore also fell. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was flat after climbing 1 percent on Wednesday.

Chinese shares lost 1 percent. Wednesday's move by the Chinese central bank to ease policy failed to lift the mood in the rest of the region.

"Although the move by PBOC does ease credit and may be beneficial to stimulating demand, it is also a clear sign that growth in China is declining at faster rate than previously thought," Boris Schlossberg, managing director at BK Asset Management, wrote in a note to clients.

The dollar was little changed against the yen at 117.215 yen JPY=. The market was waiting for U.S. employment data on Thursday and then Friday's non-farm payrolls report.

Safe-haven gold XAU= was up 0.2 percent at $1,271.81 an ounce, after adding 0.8 percent on Wednesday. Ten-year German government bonds, another haven, also gained DE10YT=TWEB.

"We think the Greek issue will likely stir things up for a little while longer in the markets, which is why we think gold should benefit, likely at the expense of equities," INTL FCStone analyst Ed Meir said in a note.

Reuters

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