Greek stocks, bonds down on concerns Greek banks may have ECB funding problems

Greek markets fell on Wednesday on concerns that the country's economic problems may deprive its banks of cheap funding from the European Central Bank (ECB).
The Socialist government, which won an election last month promising to tax the rich and help the poor, accuses the former conservative government of hiding the scale of problems in the euro zone's most troubled economy.
It says Greece has been in recession for most of 2009, with borrowing spiralling out of control.
Bond and stock prices fell on worries that any further downgrading by ratings agencies of Greek debt could mean banks will no longer be able to use Greek bonds as collateral to borrow cash from the ECB.
"If the downgrades of the country's credit ratings continue … we will find ourselves in the terrifying position of not drawing liquidity from the ECB because of the risk bonds may not be accepted," Greek central bank chief George Provopoulos told parliament on Tuesday.
Spreads between Greek 10-year bonds and benchmark German Bunds — showing how markets estimate the relative risk on both countries' borrowings — widened to a 5-month high of 181 basis points early in the day before easing to 179.
This means yields on Greek government debt were 1.81 percentage points higher than on the German equivalent.
The gap exceeded the spread over German Bunds on bonds issued by Ireland — another deeply troubled euro zone member — by about 23 basis points.
The cost of protecting Greek debt against default also jumped, with the five-year credit default swap climbing to 193.6 from 188.9 basis points at the New York close on Tuesday. "Until we see the measures the new government takes to deal with fiscal problems, Greece will be high risk and borrowing will be more expensive," said Takis Zamanis, chief trader at Beta Securities.
Bank stocks closed 4.13 percent down after a 7 percent drop in mid-trade, dragging the overall market about 2.3 percent lower at the end of the day.
HEAVY USE OF ECB FUNDS
Greek banks have been big users of ECB funding, drawing around 40 billion euros ($60 billion) of cheap liquidity out of a total of about 665 billion to euro zone banks. This is about 6.3 percent of the total whereas Greece's economy produces only about 2.5 percent of euro zone GDP.
The banks have used mostly government bonds as collateral. They have then put the cheap funds from the ECB in other investments yielding annual returns of between 3 to 4 percentage points more than the ECB interest rates.
Greek banks fared better than their European peers during the financial crisis because they have little exposure to toxic assets which hit many international institutions.
They were given a 28 billion euro support package by the previous conservative government to pump into a slowing economy, but little of this trickled down.
Greek banks said the market reaction was exaggerated and that they were well placed for when the ECB starts withdrawing some of the huge sums it has pumped into the euro zone financial system to revive the bloc's economy.
"Greek banks have already taken measures … so as to protect their capital adequacy and to create liquidity reserves so as to replace in a timely fashion whatever liquidity has been raised from the ECB," said National Bank CEO and Greek Bank Association president Takis Arapoglou.
Finance Minister George Papaconstantinou said markets were reacting to Greece's lack of credibility after five years of conservative rule that left the economy in a shambles.
"We must address this credibility deficit within the next few months with a convincingly feasible programme," he told parliament. "We are walking a tightrope, balancing between fiscal discipline and the obvious need to support the economy."
The economy is expected to shrink by up to 1.5 percent this year in Greece's first recession since 1996. The budget deficit is forecast to reach 12.7 percent of GDP this year, double the previous estimate, while Greece's debt will rise to 113.4 percent of GDP, the highest ratio in the euro zone after Italy's.
Under pressure from its euro zone partners, the government has promised to cut spending in 2010 and bring down the deficit to 9.1 percent of GDP.
"The budget for next year is quite ambitious," said Diego Iscaro, analyst at IHS Global Insight. "Now they must stick to their promise. If they don't deliver, markets will punish them."