ECB tightens hold on Greek banks

By Pierre Briancon

The Eurozone's central bank adjusts the collateral required for helping Greek banks to reflect the increased risk.

The European Central Bank decided Monday to keep emergency assistance to Greek banks at its current frozen level but made it slightly more difficult for the country’s lenders to obtain the funds they need.
By increasing the “haircut” it applies to the collateral that Greek banks must put up to get the liquidity they seek, the ECB took the risk that one or more banks in danger of going bust might have to be restructured — “resolved” in banking lingo — which would force losses on shareholders and creditors.
“The financial situation of the Hellenic Republic has an impact on Greek banks …,” the ECB’s Governing Council said after a teleconference, adding in a statement that it had decided to “adjust the haircuts on collateral accepted by the Bank of Greece” for emergency liquidity assistance.
The ECB’s decision seems to reflect divisions within its 25-member governing council on whether to keep the lifeline open to Greek banks — or turn off the tap altogether in response to Sunday’s referendum, when Greeks rejected with an unexpectedly large majority the austerity program required by Greece’s creditors in exchange for its bailout program.
The Eurozone’s central bank had decided on June 28 to stop raising the ceiling of liquidity extended to the Greek financial system, which forced the government to close the banks and impose capital controls.
The ECB has since been been accused by Greek leaders and their academic supporters abroad of wrecking the financial system and trying to depose a democratically-elected government. In some lender countries, such as Germany, it is being accused on the contrary of keeping a bankrupt state afloat for political reasons.
The banks were scheduled to reopen Tuesday but will remain closed for two more days, according to Greek authorities. Under the capital controls, Greek depositors are only authorized to withdraw €60 euros daily in cash.
The ECB’s latest decision shows that even though it is ready to play tough, it has decided to wait a few more days before making a radical decision on whether to increase or cut off the lifeline for Greek banks.
It would have been difficult for ECB President Mario Draghi to make such a drastic decision before emergency meetings of eurozone finance ministers and leaders in Brussels on Tuesday. He must first assess whether there is any chance left for a future reforms-for-cash deal between Greece and its international creditors.
“The very-short term situation is very simple. Strangely enough, the important thing to do right now is nothing,” said a European official involved in the talks. “You don’t want to appear to punish the Greeks after a popular vote, so anyone talking about a euro exit is out of his mind. But there’s no reason you’d give away the farm.”
The Greek prime minister on Monday had expressed his intention of discussing the closure of the country’s banks with the creditors, but in the rest of Europe the view is that it is up to Athens to decide when the bank should reopen.
“We should wait for Tsipras’ proposals. Remember his banks are bust at the end of the week without ELA,” said a European government official.
If Tuesday’s summit does give an even mildly positive signal, the ECB could use this as cover to raise the bank funding ceiling, even if only by a relatively small amount that would send reassuring signals to financial markets.
If the emergency eurozone summit ends in disarray, it could delay its decision until the end of the week — but not beyond.
Draghi has to deal with divisions in the ECB’s governing council, where Bundesbank chief Jens Weidmann recently summed up the hardliners’ hostility to ELA by saying they raised serious concern about monetary financing of governments by the central bank, which in theory is prohibited under the euro’s founding treaty.
But Weidmann’s opposition may be more for show than deep-rooted, said European central bank official, adding that while the Bundesbank chief opposed the Greek bank lifeline in public, he was “secretly happy that it prevents the system from going bust.”
Fast forward to next week, with mounting worries that two ECB Greek bonds worth €3.5 billion won’t be repaid in full on July 20.
The amount Greece needs to find by then — or borrow from its creditors — is actually higher than €5 billion, because it would have to pay back money owed the International Monetary Fund before it can reimburse the ECB.
Athens said on June 30 that it couldn’t pay the IMF €1.6 billion due on that date, but the IMF is senior creditor and must be paid back before anyone else can.
Defaulting on the IMF was bad enough. Defaulting on the ECB could spell the beginning of the end for Greece, which might find itself unable to finance itself for years.