ECB ensnared in politics as it faces vote on Bank of Greece loans

19/5/2015

By Claire Jones

The European Central Bank is supposed to be apolitical but it has found itself ensnared by eurozone politics.

On Wednesday, the ECB’s 25-member governing council, which is led by ECB president Mario Draghi, could discuss toughening up the collateral requirements for the Bank of Greece’s emergency loans in a move that would make life harder for Greece and its banks.

It is possible that two thirds of the council will support the move as soon as the Wednesday vote.

The haircuts were lowered last year after Greece returned to capital markets. The council is considering returning to the levels applied before the reduction, according to two people familiar with the matter. This would lower the level of collateral held by Greek banks eligible for emergency loans from €95bn to €88bn and is viewed by insiders as a relatively incremental shift.

A more severe move would be for the ECB to cut off its special programme of bank loans, a key source of cash, altogether. Dubbed “emergency liquidity assistance”, it has kept Greece’s banks afloat since the Syriza-led government’s pledge to exit a bailout programme triggered a ban on the use of the country’s debt as collateral for the central bank’s regular cash auctions. At the moment, lenders can tap the Bank of Greece for up to €80bn in emergency loans, with the figure rising slightly in recent weeks. Athens hopes to use such short-term debt issuances to finance itself while negotiating a revision of its bailout.

Under the terms of ELA, the Bank of Greece is responsible for any losses from the loans, which are usually more expensive than the ECB’s regular financing.

But some of the more hawkish members of the council are becoming fearful that a default by Athens, followed by a Greek exit from the currency area, would leave the rest of the Eurosystem responsible for picking up the tab.

The council’s arch hawk, Jens Weidmann, the president of Germany’s powerful Bundesbank, made his position clear. Mr Weidmann told the German newspaper Handelsblatt that it was not the job of the ECB to provide financing to simply buy more time until a deal could be reached between Athens and its creditors.

The German central bank has in recent weeks pushed for ELA to be stopped completely as the risk of bankruptcy has risen, according to one person familiar with the matter.

Most on the council would view a cut in ELA as an extreme option, which would only happen in the event that Greece failed to meet a significant commitment, such as its next payment to the International Monetary Fund, which is due in early June.

If Greece agrees a deal that would lead to the disbursement of funds, the ECB has hinted it would reward Athens by raising the ceiling on the acceptance of t-bills, or short-term debt issued by Athens. At the moment, issuance of t-bills is capped at €15bn. The ECB will only accept €3.5bn-worth of the debt as collateral from Greek lenders.

The proposal is set to meet with opposition from hawks, including the Bundesbank. They view both a raising of the t-bill ceiling and ELA itself as breaking rules which prohibit the ECB’s financing of insolvent governments.

There is broad consensus that the onus is firmly on the Greek government to compromise first on its red lines.

But there is also growing anxiety among moderates that, as the scrap between Greece and its creditors grows increasingly fractious, it is the technocrats at the ECB who could find themselves in the position of forcing Athens out of the currency union.

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