The ECB just made an worrying move in approving more emergency liquidity for Greek banks


The European Central Bank (ECB) just increased the amount of emergency funding available to Greek banks by €5 billion — despite indications that the savers were pulling less of their money out in February.

On Thursday the ECB announced that it was extending the Emergency Liquidity Assistance that can be given to Greek banks from its current maximum of €60 billion to €65 billion. However, their reasons for doing so remain unclear.

Earlier reports had suggested that fears of deposit flight, where Greek savers withdrew their money from banks and deprived them of a key source of funding, after the left-wing Syriza party took power and the ECB altered its rules to prevent Greek government debt (and government-guaranteed debt) from being used to access its emergency loan programme were failing to materialise. A survey of Greek banks found that although savers remained nervous about the new government’s plans deposit outflows had slowed in February, according to Reuters.

The chart below shows why deposit flight would increase pressure on the banking system:

Greek banks ECB
Greek bank funding mix. Moody’s

But if deposit outflows are slowing, it is hard to explain the ECB’s move here. Greek banks can still use bonds issued by the European Financial Stability Facility (EFSF) — the eurozone bailout fund — to access ECB loans and appear to have sufficient emergency funds to cover any shortfall resulting from the change in the central bank’s collateral rules.

Here’s a table from Karl Whelan showing Greek banks’ current holdings — you can see they hold a large amount of EFSF bonds:

Greek Banks
Greek bank balance sheets.

So, if Greek banks are indeed correct that deposit outflows have slowed, the only reason I can think of behind today’s move is that the ECB is acting to reassure markets after European finance ministers failed to agree on a statement yesterday on a possible resolution to the Greek bailout negotiations. If that proves incorrect, we could be left with the conclusion that Greek banks’ funding problem is even bigger than we have so far been led to believe.

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