ECB holds back on ultra-cheap loans to Greek banks

2/6/2016

By Claire Jones and Eleftheria Kourtali

No waiver yet on using Athens bonds as bank collateral

The European Central Bank has dealt a blow to Greece’s attempts to rehabilitate its ailing financial system, saying it would wait at least three more weeks before allowing Greek banks access to its ultra-cheap loans.

The delay came at Thursday’s ECB meeting in Vienna where policymakers left interest rates on hold even though they marginally raised forecasts for eurozone growth and inflation. The cautious stance defied market expectations of a more robust upgrade in economic projections.

Senior officials in Athens had believed the ECB governing council would use the Vienna meeting to reinstate a waiver that allows the central bank to accept Greek government bonds as collateral for their cheap loans, despite the bonds’ junk credit rating. Greek optimism stemmed from last week’s deal to release €7.5bn in EU bailout funds next month after a long stand-off.

Instead Mario Draghi, the ECB president, said while the council discussed the waiver, no decision would be made until Athens had completed all elements of the first review of its €86bn bailout, a prerequisite to getting the €7.5bn tranche.

The ECB’s stance on central bank loans to Greek banks, which the lenders need to run day-to-day operations, has been one of the main tensions between eurozone authorities and the far-left government in Athens for more than a year.

At the hight of last year’s stand-off, Alexis Tsipras, the Greek prime minister, accused the ECB of trying to put pressure on his government to accept tough bailout terms by cutting off access to the cheap ECB loans, forcing Greek banks to rely on more expensive emergency assistance from the Bank of Greece.

Mr Tsipras’ reaction was more muted on Thursday, however, telling his cabinet he believed the first review would be completed in a matter of days and expected ECB loans to be reinstated shortly thereafter.

“There will be time for us to celebrate only when we have reduced unemployment [and] entered a path of growth,” Mr Tsipras said.

Because credit rating agencies have categorised Greek government bonds as junk, they must be granted the waiver to be accepted by the ECB; the waiver was scrapped last February when Mr Tsipras was in the midst of a stand-off over the terms of its bailout programme.

Mr Draghi acknowledged Greece’s “significant progress” in living up to the bailout’s terms, but added that a decision would have to wait until the council’s next meeting, which is on June 22.

“Reinstatement of the waiver was important as it carried both symbolic and substantive benefit,” said Mujtaba Rahman, a director at Euroasia Group, adding that it was a “big political loss” for Mr Tsipras’ government.

“For investors, it would have signalled growing ECB comfort with Athens’ reform path and provided a clear pathway to Greece’s eventual participation in the quantitative easing programme of the central bank,” Mr Rahman said. “In the near term it would have been a nice liquidity boost for Greek banks and the real economy.”

In the past, ECB officials have signalled the waiver could be reintroduced if the first review of Greece’s latest bailout programme is successfully concluded. The Greek government is looking to pass laws to complete the first review of its bailout programme over the coming days.

The measures Athens has been given the job of implementing include changes to pension benefits, non-performing loans and simplifying public-sector wages.

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