ECB faces tough choice on cash life­line for Greece


In a bid to keep mar­kets calm, the Euro­pean Cen­tral Bank made a tough choice when it opted to keep open the fi­nan­cial life­line to Greek banks at the week­end, an­a­lysts said on Mon­day.

But it faces an even tougher de­ci­sion later this week, when it con­venes again to dis­cuss whether to con­tinue to pro­vide liq­uid­ity af­ter the of­fi­cial ex­piry of Greece’s bailout pro­gram on Tues­day, an­a­lysts said.

Af­ter talks be­tween Athens and its cred­i­tors broke down, leav­ing Greece headed for an EU-IMF de­fault and pos­si­ble exit from the eu­ro­zone, the ECB said on Sun­day it would keep open Emer­gency Liq­uid­ity As­sis­tance (ELA) to the debthit coun­try’s banks.

Sig­nif­i­cantly, how­ever, as anx­ious cit­i­zens lined up to get cash from bank ma­chines, the ECB de­cided not to in­crease the liq­uid­ity, even if it said it could re­con­sider that de­ci­sion at any time if the sit­u­a­tion war­ranted.

The ECB’s gov­ern­ing coun­cil is sched­uled to meet again on Wed­nes­day.

The rapid es­ca­la­tion of the Greek cri­sis, and the loom­ing prospect of a pos­si­ble “Grexit” — or Greek exit from the eu­ro­zone — sent global mar­kets tum­bling on Mon­day as Greece or­dered its banks to shut for a week and im­posed cap­i­tal con­trols.

Stocks in Frank­furt and Paris shed more than four per­cent. The Athens mar­ket is shut un­til July 7.

The ECB has been the life­line keep­ing Greek banks — and by ex­ten­sion the Greek state — afloat with the ELA emer­gency cash through five months of tor­tu­ous ne­go­ti­a­tions that have now taken a sharp turn for the worse.

Locked out of the ECB’s reg­u­lar re­fi­nanc­ing oper­a­tions, Greek banks’ sole source of liq­uid­ity is the costlier ELA fa­cil­ity.

While an­a­lysts said the ECB would not shut down the liq­uid­ity pipeline com­pletely un­til the out­come of Greece’s ref­er­en­dum is known next Sun­day, the de­ci­sion not to in­crease the vol­ume of cash would turn up the heat on Greece.

‘Over­due’ De­ci­sion

The ECB de­ci­sion was “over­due,” said Com­merzbank economist Jo­erg Kraemer.

By freez­ing the ELA life­line at around 89 bil­lion eu­ros (US$99 bil­lion), the ECB cen­tral bank was forc­ing Greece to limit money flows to pre­vent its bank­ing sys­tem from run­ning out of cash, he said.

Observers said that with cap­i­tal con­trols now in place, Greek banks would have suf­fi­cient liq­uid­ity un­til the ref­er­en­dum.

“Now, all hinges on the ref­er­en­dum. The eurogroup can­not push Greece out of mon­e­tary union be­fore such a demo­cratic vote. There­fore, the ECB did not ter­mi­nate ELA but de­cided to keep level,” Kraemer said.

Eu­ro­zone fi­nance min­is­ters and the ECB would be at pains to make it clear to Greek vot­ers that if Greece is to re­main a mem­ber of the sin­gle cur­rency area it must ac­cept the re­forms its cred­i­tors are de­mand­ing, he added.

But if Greece votes “No” in Sun­day’s ref­er­en­dum, “the ECB would prob­a­bly have the sup­port of the head of gov­ern­ments and states to ter­mi­nate ELA al­to­gether,” Kraemer said.

“This would de facto be the end

it on Fri­day’s of the euro mem­ber­ship of Greece,” he added.

Beren­berg Bank economist Hol­ger Sch­mied­ing said the ECB “will do its ut­most to con­tain the Greek risk, pre­vent con­ta­gion and pro­tect the eu­ro­zone as a whole.”

Back in 2012, ECB chief Mario Draghi made his fa­mous pledge to do “all it takes” to save the euro. And that had shown that mere ver­bal in­ter­ven­tion on the ECB’s part could suf­fice to re­store con­fi­dence, Sch­mied­ing said.

This time round, the ECB could see if words alone could again con- tain the mar­ket fall­out from Greece.

“But if mar­kets suf­fer too much for too long and if in­di­ca­tors of fi­nan­cial stress show ma­jor prob­lems ... the ECB would act,” Sch­mied­ing said.

Eye­brows have been raised at the ap­par­ently open-ended na­ture of ELA to Greece.

The head of the Ger­man cen­tral bank, Jens Wei­d­mann, for one, 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.

UniCredit economist Erik Nielsen saw the ECB’s will­ing­ness to con­tinue pro­vid­ing ELA as the fi­nal de­ci­sion over whether Greece stays or leaves the eu­ro­zone.

“Of course, the Greek gov­ern­ment can de­cide to leave, but know­ing that that’s po­lit­i­cal sui­cide, they won’t make that de­ci­sion. And while it’s for­mally a tech­ni­cal de­ci­sion whether to pro­vide the ELA ... that de­ci­sion will not be taken with­out po­lit­i­cal cover at the high­est level,” Nielsen said.

“It is clear that Europe will keep the Greek boat afloat through the ref­er­en­dum, and rightly so,” he added.

3. A trader sits in front of his screens where Greek Prime Min­is­ter Alexis Tsipras is be­ing dis­played at the stock ex­change in Frank­furt am Main, Ger­many, Mon­day.


1. A pic­ture taken on Mon­day, June 29 in Lille, France shows Drachma bills, Greece’s for­mer cur­rency, next to the euro logo. 2. Dutch Fi­nance Min­is­ter and Eurogroup Pres­i­dent Jeroen Di­js­sel­bloem gives a joint press con­fer­ence dur­ing a Eurogroup meet­ing at the EU head­quar­ters in Brus­sels on Satur­day, June 27.

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