By Jeff Black and Nikos Chrysoloras Jan 13, 2015 9:56 AM GMT+0200
The European Central Bank is threatening to choke off funding to
lenders in the hope it won’t actually need to. Greece
Parliamentary elections on Jan. 25 hinge on whether Greek voters are willing to accept a strings-attached successor to the country’s international bailout package. Under President Mario Draghi, the Frankfurt-based ECB has made its position clear: No program means no guarantee of cash from us.
Draghi is reprising an ECB tactic honed in the Irish and Cypriot stages of
Europe’s debt crisis, where the prospect of vanishing
central-bank funds helped prod politicians into action. Amid anti-austerity
promises by the Syriza party, which leads in polls, the ECB is signaling a
willingness to withdraw 30 billion euros ($35 billion) of finance even if it
into a crisis that ultimately sees it leave the single currency. Greece
“While these things might be threatened, bandied around, it would be remarkable if such a step were actually taken,” said James Nixon, chief European economist at Oxford Economics Ltd. in
“The negotiation starts off with the threat of mutually assured destruction.
But to actually withdraw funding from Greek banks is the sort of thing that
would mean London
is well on the road to exiting the euro.” Greece
Since 2010, the ECB has accepted
junk-rated government debt and state-backed securities as collateral in its
refinancing operations as long as the administration complies with austerity
measures and reform pledges in its international aid agreements. Greece
Greek banks rely on those operations for about 45 billion euros of funding. Finance Minister Gikas Hardouvelis has estimated that about two-thirds of that would have to be replaced if the central bank’s exemption is dropped.
The stakes are high, with Hardouvelis telling Bloomberg Television in an interview that
stumble out of the euro if a new government fails to reach an agreement with
international creditors soon after the election. Greece
The prospect of a Greek exit “is not necessarily a bluff,” he said in
accident could happen, and the whole idea is to avoid it.” Athens
Time is running out, with the current aid agreement with the European Commission, the ECB and the International Monetary Fund expiring at the end of February. Continuing to suspend normal collateral requirements assumes “a successful conclusion of the current review and an agreement on a follow-up arrangement,” the ECB said in a Jan. 8 statement.
An arrangement such as an Enhanced Conditions Credit Line could be a difficult-enough negotiation for Prime Minister Antonis Samaras. For Syriza leader Alexis Tsipras it may be out of reach if he continues to reject austerity measures that would likely be part of an ECCL. He plans to roll back budget cuts to alleviate poverty and might write down some of
’s debt. Greece
Syriza is on course to get 28.1 percent of votes in the election, compared with 25.5 percent for the premier’s New Democracy, according to a poll by Kapa Research for the To Vima newspaper published on Jan. 10.
Executive Board member Benoit Coeure, who represents the ECB on international matters, told
France 24 last week
that “whatever the result of the elections, must continue with reforms.” Greece
Even so, the central bank could end up playing a key role. Hardouvelis told To Vima on Dec. 27 that if “extreme” anti-European forces prevail in
, the ECB
could cause the “asphyxiation” of the economy. Greece
One remedy for banks facing the loss of ECB cash in the past has been an escape hatch known as Emergency Liquidity Assistance. That’s an instrument
used ELA in 2012 during its 100 billion-euro debt restructuring, is about to
get a taste of again, regardless of its election outcome. Greece
As of March 1, the ECB will no longer accept some forms of uncovered government-guaranteed bank bonds from any euro-area issuers. Cash-strapped Greek lenders will probably have to plug the gap with ELA. While the funds are provided at the national central bank’s own risk, they must be approved by the ECB, still giving it leverage.
In November 2010, as
prevaricated over whether to ask for a European bailout, a letter from then-ECB
president Jean-Claude Trichet to the sitting finance minister, Brian Lenihan,
helped tip the balance. Citing the “extraordinarily large” ELA to Irish banks,
Trichet bluntly said further approval was conditional on a formal aid request. Ireland
parliamentarians rejected the terms of a bailout offer in March 2013, the ECB
gave the country four days to approve an alternative before it revoked funding
Still, concern over
use of ELA has since curbed the ECB’s enthusiasm. The Governing Council has
said it will consider whether provisions of more than 2 billion euros to any
lender or banking group “may interfere with the objectives and tasks of the
That’s an issue in
where lenders are among the most heavily reliant on central-bank funds.
Refinancing accounts for about 11 percent to 12 percent of the national
banking-sector balance sheet, according to ECB data. Greece
That percentage would rise if Greek depositors increase withdrawals amid the political uncertainty. Net withdrawals were about 3 billion euros in December and have accelerated since then, according to a Greek banker with knowledge of the matter.
Hanging over the whole debate is how the country would be handled should the ECB decide to start buying government bonds to fight the threat of deflation in the euro area. Policy makers will consider a QE package in
on Jan. 22.
“I’d personally find announcing a bond-buying program including Greek government bonds in January problematic,” Governing Council member Ardo Hansson told Bloomberg News in an interview last week. “When there’s a chance that somebody will come and say I’m going to restructure our debt, committing to buy such bonds is near borderline of what could be considered.”
Greek voters and the new government will eventually have to decide how far they are prepared to try to roll back austerity efforts before the ECB objects.
“It will not be in Tsipras’ interest to set his government on a collision course with the ECB,” George Pagoulatos, professor of European politics and economy at the Athens University of Economics and Business, said by phone. “But in order for a potential Syriza government to make a U-turn, we’ll first see brinkmanship and edge-of-the-cliff diplomacy.”
To contact the reporters on this story: Jeff Black in Frankfurt at firstname.lastname@example.org; Nikos Chrysoloras in
at email@example.com Athens
To contact the editors responsible for this story: Fergal O’Brien at firstname.lastname@example.org Paul Gordon, Zoe Schneeweiss