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The ECB is barred from lending to banks that are under-capitalised based.
Instead, these banks have to turn to the Emergency Liquidity Assistance program (ELA), which allows the Greek Central Bank to print funds on an emergency basis in order to backstop banks. The report suggests that this lending has now been frozen.
A subsequent report said that the EFSF will provide €18 billion to recapitalize the banks almost immediately, according to MNI. It is set to approve those plans within the next four days.
It would appear that previous ELA efforts have been less than successful, as they have not allowed European banks to return to solvency. The ELA has been a contentious program since its inception, as it allows national central banks that have access to the program to print money without the all typical authorizations that would be necessary to expand the euro money supply.
Presumably, ECB lending would resume after the bank recapitalizations by the EFSF had been successfully completed. MNI noted that today’s decision to suspend lending to banks is “a means of expediting the decision” to recapitalize the banks using international funds.
EARLIER: Earlier today, The ECB, which has been propping up the Greek banking system via it’s emergency liquidity assistance (ELA) provisioning, is today reportedly discussing freezing ELA facilities for the time being.
According to an unnamed senior Greek government official, the ECB is concerned over the time it’s taking to move forward with recapitalization plans for the Greek banking system, which in turn is straining the ECB as it continues to provide ELA.
He added that the delays were mainly due to the fact that the Greek Financial Stability Fund, established by the Troika in Greece’s first bailout program to finance ailing Greek banks, has up until now refused to allocate the necessary funds to four main Greek banks, despite an assessment by the Bank of Greece that the banks were eligible to receive the money. The Greek Financial Stability Fund was initially established with E10 billion, money that was part of the bailout aid. But the amount now in question has risen to E18 billion.
“Even though the Bank of Greece report concluded that these four banks were eligible, the Fund refuses to inject the 18 billion euros and this is making the ECB very nervous,” the official said.
Fuel for the fire.