Greece: Here’s What Happens Next

The ECB made it clear yesterday that the suspension of Greek sovereign debt as eligible collateral came because a successful conclusion of the current Greek troika program review had become impossible.

To get that certainty back and allow Greek debt back on to the ECB collateral list, either the current review must be concluded successfully—the chances of which are approximately zero—or an agreement must come on a new program for Greece. A program is essentially a set of rules attached to a bailout.

In the press conference following his meeting with German Finance Minister Wolfgang Schäuble this morning, Greek Finance Minister Yanis Varoufakis suggested that Greece should receive a bridging program until the end of May to allow the new Greek government time to finalize details of their program proposals. 

A short-term bridging program would not be enough to make the ECB change its mind on collateral eligibility, but it would give politicians time to come to an agreement on a longer-term solution for Greece.

All members of the euro area would have to agree to that bridging program  at the next Eurogroup meeting on Feb. 16 in Brussels. 

Ahead of that Eurogroup meeting, Varoufakis has few allies he can rely on among euro area finance ministers, with only the French finance minister offering public support for any new program.

If a bridging program can be agreed to at the Eurogroup meeting, there will then be some months of difficult negotiation ahead for Greece and its lenders. With Varoufakis today saying that he did not even reach an agreement to disagree with Schäuble, all parties still have a long way to go to reach the necessary common ground for a sustainable agreement.

Absent that agreement, Greek banks can continue to rely on ELA funding for the moment. (See an explainer here for how ELA works)

If there is a complete breakdown in negotiations, however, it is likely that the ECB will then take the view that the Greek banks will have become insolvent at that point, due to their holdings of Greek debt.

Were that to happen, Greece would find itself not enjoying the full benefits of euro membership.