The ECB goes all-in

The European Central Bank decided today to lift the waiver of minimum credit rating requirements for Greek government bonds, preventing banks to use the country’s debt as a collateral.

According to a document released by the ECB’s Governing Council, it is “not possible to assume a successful conclusion of the programme review”.

The latest data show that Greek banks have borrowed €56 billion in December 2014 and €70 billion in January 2015 from the Eurosystem facility, a system based on loans coming directly from the ECB, with the risk of not being paid back shared among the 19 eurozone member states.

Since 2010 Greece can no longer guarantee to repay loans using government bonds and other government-guaranteed assets as collateral, which amounts to just €12 billion, according to the Bank of Greece.

Although Greek bonds have been junk-rated – de facto missing the ECB’s minimum requirements – a special line of credit has been put in place by the ECB itself under the condition that Greece would comply with the financial and economic programme imposed by the Troika (ECB+IMF+European Commission) since 2010.

Given the instability that Greece is facing following last month’s election and the pledge by the Syriza government to refuse a plan based on the old bailout, the system has now been cut off.

The ECB has also said that the Emergency Liquidity Assistance (ELA) funding will still be available to Greek banks and will replace the Eurosystem lending to satisfy the liquidity needs of banks.

This is a key point because recent outflows from Greek banks have increased abruptly, going from December’s €4 billion to January’s €11 billion, and the current political uncertainty could spark more money being pulled from the bank accounts.

While the regular financing has an interest rate of 0.05%, the ELA liquidity carries an interest of 1.55%, hence asking for new funding could become very expensive for the Greek banks which are already under stress.

According to the ECB rulebook a majority of two-thirds of the Governing Council is required for the provision of ELA funds and failing to obtain such consensus would lead to the ECB pulling the plug once and for all, with the dramatic consequence of Greece been forced out of the euro.

Today’s decision by the ECB is clearly a political move rather than just a monetary one. By acting so decisively Mr Draghi is pressing the Greek government and the other European partners to find a solution on the bailout programme as soon as possible, in what could be the last attempt to keep Greece inside the eurozone after five long years of crisis.

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One thought on “The ECB goes all-in

  1. Pingback: Syriza vs Troika, part I | Pensieri d'oltremanica

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