After last month’s political instability, Greece received yet another blow from the European Central Bank (ECB). The ECB on Wednesday announced that it would no longer accept Greek government debt as collateral for regular central bank loans, cutting off access to a key source of funding for Greek banks.
This is likely to put fresh pressure on the country’s new government to rewrite the terms of its €240 billion bailout from the troika of the European Central Bank, the International Monetary Fund (IMF) and the European Commission (EU).
Greek bonds are presently junk rated and are thus below the ECB’s minimum threshold to qualify as collateral. The recent move by the ECB means that the Greek central bank will now have to provide its banks with Emergency Liquidity Assistance (ELA), putting Greek banks in a tight corner as these are already facing signs of capital flight. The banks had earlier used their holdings of Greek government bonds to borrow from the central bank at an interest rate of just 0.05%.
However, Greek banks will still have access to funds through the ECB’s emergency lending program, though the loans will carry a higher interest rate. However, the credit risk of the loans stays on the books of the Greek central bank.
The move by the ECB is significant as it sends a clear signal to Greece's new Prime Minister Alexis Tsipras that the lenders are determined to force Greece to reach a compromise about any new potential debt terms. Moreover, it implies that if the Greek central bank is unable to solve its funding issues, the nation’s cash strapped government would have to step in for rescue.
Market Impact
The recent move by the ECB to tighten the country’s banking system made investors nervous, who then dumped Greek shares. Investors feared that ECB’s latest announcement might lead Greece to exit from the Euro zone. The Greek stock market shed more than 9% in early trading on Thursday following ECB’s move.
Moreover, Global X FTSE Greece ETF (NYSE:GREK), which tracks the performance of Greek stocks, plunged more than 10% on Wednesday following ECB’s announcement. Though GREK managed to recover part of its losses on Thursday and gained 4.4%, investors should cautiously trade the product.
Below we have highlighted some of the details about the product.
GREK in Focus
The product tracks the FTSE/ATHEX Custom Capped Index and is home to a basket of 22 stocks. The fund manages a small asset base of $150.7 million and trades in solid volumes of 560,000 shares per day. The product holds a small basket of 24 stocks and is heavily concentrated in the top five holdings that make up for a combined 43.4% of assets.
Financials takes the top spot at 32.5% in terms of sector holdings, followed by consumer discretionary (14.4%), consumer staples (13.4%) and materials (9.8%). The fund charges a fee of 65 basis points on an annual basis.
The fund is down 7.3% in the year-to-date frame and currently has a Zacks Rank #3 or Hold rating.