The European Central Bank decision to remove Greek bonds from the list of accepted collateral shook the European markets, putting pressure on shares and investors to seek the safe-haven status of German bonds instead.
The pan-European FTSEurofirst 300 index eased 0.4 percent, while the single currency, Euro, dropped. Greek bank shares dropped 15 percent, which contributed to the 6 percent decline in the Athens stock market. Yields on 5- and 3-year Greek debt advanced 190 and 220 basis point, respectively.
The ECB’s ban on Greek bonds signifies that the Greek central bank itself must provide billions of Euros to Greek banks as emergency funding. If the ECB Governing Council finalizes this decision, it would become the ECB’s most intense response to Greece’s efforts.
Jens Weidmann, president of Germany’s Bundesbank, noted that the ECB must enforce strict measures in terms of emergency funding for Greek banks. “(Emergency liquidity assistance) should only be awarded for the short term and to solvent banks. 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.”
Analysts view the current Greek issue as a cause for concern and deem equities could get hit in the process due to prolonged volatility. FCStone analyst Ed Meir said, “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.”
The new Greek government, headed by Prime Minister Alexis Tsipras who was elected last January 25, was isolated during its very first meeting with top Eurozone officials. However, the Greek officials have a chance to put their plans on the table during a planned special meeting of Eurozone finance ministers in Brussels in the coming week.
Prime Minister Alexis Tsipras and his team plan to put an end to austerity measures, raise the minimum wage, halt some privatizations, and re-hire some sacked government officials. His plans are in conflict with the commitments of prior governments with the IMF and other Eurozone countries.