5 February 2015

ECB restricts Greek banks’ access to liquidity earlier than expected

The ECB has announced that, as of next Wednesday, it will no longer accept securities “issued or guaranteed” by Greece as collateral from Greek banks in return for liquidity. That includes both Greek government bonds and bank bonds guaranteed by Athens. The decision is not surprising in itself. The ECB had made it clear that it would not keep providing unlimited cash to Greek banks unless the new SYRIZA-led Greek government agreed to an extension of the EU-IMF bailout programme, with all the conditions attached, before 28 February – when the programme is due to expire.

But the move came earlier than expected, with a clear aim: make the Greek government feel the heat and push it into a deal before the end of the month. Predictably, Greek banks took a hammering on the Athens stock market this morning.

Greek banks will still have access to cash

However, the ECB also said that Greek banks can still get emergency cash from the Greek Central Bank via the so-called Emergency Liquidity Assistance (ELA) facility – the details of which are not always easy to pin down. A Greek official, for instance, said this morning that Greek banks have been given the green light to tap an additional €10 billion over the existing ELA ceiling if necessary – but did not specify what the previous ceiling was.

We already noted on this blog that Greek banks are now less reliant on central bank cash than they were two or three years ago. According to the latest available data, Greek banks’ total borrowing from the Eurosystem stood at around €56 billion at the end of December 2014 – up from nearly €45 billion in the previous month. This is 14% of their aggregated balance sheet (€397 billion).

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Furthermore, data also show that Greek banks held only around €12 billion of Greek government bonds at the end of last year. All this seems to suggest that Greek banks will not face an unmanageable shortage of liquidity in the immediate future.

But this is no permanent fix

However, ELA is no permanent fix.

First, getting cash via ELA is more expensive. Greek Central Bank Governor Yannis Stournaras said in a recent interview with Kathimerini:

Today, Greek banks refinance their loans from the Eurosystem at a cost of about 0.05%. In the unwelcome case that they need to turn to ELA, the cost will be around 1.55%.

Kathimerini: Debt relief “still needed”, says Bank of Greece chief (29 November 2014)

Second, although ELA is provided by the Greek Central Bank, the ECB has the power to cut it off. Under the existing rules, ELA can only be provided to “solvent” banks that are “facing temporary liquidity problems”, and must not “interfere with the objectives and tasks of the Eurosystem”. This gives the ECB quite a bit of discretion over whether and when to pull the plug.

The ECB reviews the use of the ELA facility every two weeks – so the next assessment is due on 18 February. That said, a two-thirds majority in the ECB’s Governing Council is needed to stop ELA – meaning that it may not be that easy to gather the necessary support to turn it off.

Third, ELA alone could prove insufficient if Greek depositors were to start withdrawing their money en masse.

Your move, Mr Tsipras

The ball is now in Greece’s court. In a very uncomfortable joint press conference with his German counterpart Wolfgang Schäuble, Greek Finance Minister Yanis Varoufakis has today floated the idea of a ‘bridge agreement’ that would last until May and buy Greece some time to finalise negotiations with its Eurozone partners. He also reiterated that Greece wants to let the current bailout agreement lapse at the end of the month. Varoufakis will soon be able to test his proposal, given that an extraordinary Eurogroup meeting will take place next Wednesday.

One thing is clear: the Eurozone is ramping up the pressure on the new Greek government from all sides.