The ECB is NOT planning to cut Greek banks off from emergency funding

Mario draghi ecbREUTERS/Kai PfaffenbachECB President Mario Draghi.

Reports this morning suggesting that people within the European Central Bank have discussed ways to cut back the use of Emergency Liquidity Assistance (ELA) by Greek banks should be taken seriously. But they don’t mean that the central bank is preparing to cut Greece off.

Since the onset of the current negotiations between Greece and the organisations-formerly-known-as-the-Troika (the European Commission, the IMF and the ECB), the region’s central bank has attempted to separate its political role from its responsibility as lender of last resort in providing emergency funding to the Greek banking system.

This was most notably achieved through its cancellation of the waiver that had allowed the country’s banks to access the ECB’s emergency loan programme even though the bond collateral offered in exchange for the loans was rated below the minimum standard usually accepted.

Many, including us here at Business Insider, thought that the decision was a mistake as it forced Greek banks onto the more expensive ELA, did not really lower the exposure of the eurosystem as a whole to Greece and threatened to worsen deposit outflows at an extremely sensitive time.

In the aftermath, deposits have fallen by €7.7 billion ($US8.17 billion) in February alone, meaning they have now fallen by €24.6 billion since December. Media reports suggest they could have fallen by a further €3 billion in March taking that total over €25 billion.

This pushed up Target 2 liabilities of Greece with the ECB (a gauge of how much the Greek banks are having to rely on Emergency Liquidity Assistance (ELA)) by €44 billion from August to February, according to Bank of America Merrill Lynch.

In other words, Greece’s banking system is increasingly on life support.

And it’s unclear how it’s going to resolve the current situation as negotiations between the Syriza-led government in Athens and its creditors are making slow, if any, progress and the money it needs to pay its bills and meet debt repayments is swiftly running out.

Under this situation, the news yesterday that the Greek government is forcing local authorities to pull money out of commercial banks (estimated to total around €2 billion ($US2.15 billion)) and hand it over to the central bank will be a concern for the ECB. After all, by providing ELA to financial institutions the ECB is effectively funding that deposit outflow on top of those already going on.

Moreover, it’s of general concern that this money is being called in as it is a strong indication that the government is playing its last cards to meet this month’s payments.

So it is perhaps unsurprising that today we hear that the central bank is putting together plans for how to slow that process by increasing the haircuts the Bank of Greece imposes on the collateral it takes in exchange for the loans, in effect lowering the amount the banks can take.

But there’s a crucial caveat — as Bloomberg reports “it may be considered if Greece’s leaders fail to quickly convince euro-area finance ministers they can reform their economy and secure bailout funds“. That is, the central bank is working on contingencies in case of a failure to reach a deal over extending Greece’s bailout programme but it not attempting to pre-judge that outcome.

This is precisely what you would expect a responsible institution to be doing at this stage of the negotiations. Indeed, it’s what European citizens should demand of them.

What is less clear is who leaked this information to the press or why they thought it a sensible move to do so given the parlous situation. If they thought that threatening Greece with cutting off support, as the ECB did in the case of Cyprus and, we have subsequently learned, in Ireland before that, it will again mark an inappropriate overstep from its mandate into the domestic affairs of a member state.

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