ECB offers no increase in Greek emergency funds
The ECB’s Emergency Liquidity Assistance program, which was originally intended as a lifeline for solvent lenders that get into a cash jam, has become a tool to keep the entire Greek economy alive while bailout negotiations continued.
With bailout talks having failed and Greece likely to default on an IMF payment, the European Central Bank on Sunday decided to keep the level of its emergency cash support for Greek banks unchanged.
If the ECB had shut down the program it would have propelled Grece towards a collapse of its financial system, but the absence of fresh cash amid a bank run still means there is still pressure on the government to impose capital controls.
Here is a quick look at ECB’s the Emergency Liquidity Assistance ( ELA) program:
Normally, the ECB provides eurozone banks with liquidity on a day- to- day basis via its regular refinancing operations.
Banks receive cash in the form of very low interest loans in return for “collateral” — high- quality assets, preferably sovereign bonds, placed at the central bank as guarantee.
But given the desperate state of Greece’s finances, its sovereign bonds have been classified as “junk” for some years now, they are not normally eligible as to be used collateral.
To get around this problem, the ECB granted Greek banks a special waiver, allowing them to use Greek sovereign bonds as collateral, as long as Athens kept to the terms of its interna- tional bailout program.
But just after the new farleft government under Alexis Tsipras was elected at the end of January, the ECB decided to suspend that waiver starting from February until Athens could thrash out an agreement with its international creditors on the last instalment of its bailout program.
Program for ‘ exceptional
That left Greek banks solely dependent on the eurozone’s special ELA program for financing.
The ECB defines ELA as support given by eurozone national central banks in “exceptional circumstances and on a caseby- case basis to temporarily illiquid institutions and markets.”
The loans are made at the discretion of the country’s central bank, but they have to be approved by the ECB.
The ECB says that the national central banks may provide ELA “against adequate collateral” and only to “illiquid but solvent” credit institutions.
Any changes to the limits of ELA require a two-thirds majority in the ECB’s 25-member Governing Council, which also approves maximum ELA amounts for each individual bank.
In the case of Greece, the loans are made available by the Bank of Greece. The interest rates on the loans are higher than for the regular refinancing operations, making it more expensive for banks to borrow via the ELA facility.
Initially, the ECB’s governing council met every two weeks to decide whether to keep the ELA pipeline open for Greece, then every week.
But in face of the massive withdrawal by Greek customers in recent weeks, the governing council has been deciding on a daily basis. Currently, there is a ceiling of around 90 billion euros on the facility.
Eyebrows have been raised at the apparently open- ended nature of ELA to Greece.
The head of the German central bank, Jens Weidmann, has been openly critical, arguing that Greek banks were not solvent and that the ongoing provision of liquidity was tantamount to monetary financing, or printing money to pay off a government’s debt.
That is because Greek banks are currently the sole source of financing for the Greek government.
While ECB chief Mario Draghi has so far always insisted that the conditions for ELA were being met, he has suggested the pipeline could be shut down immediately if they were not.
The ECB could also toughen the conditions for Greek banks to receive funding under ELA.
(Left) A man walks past a piece of graffiti made by street artist N_Grams that reads “NO” in German but also “YES, IN” in the Greek language in Athens on Sunday, June 28. (Right) A man walks past a wall bearing graffiti concerning Greece’s referendum on the latest offer of a debt deal by the country’s EU-IMF creditors in Athens on Sunday.