ECB ramps up pressure on Greece

Posted on July 20, 2012

The European Central Bank has ramped up the pressure on Athens ahead of a visit by international lenders next week by refusing to accept Greek government debt in exchange for central bank funds.

The ECB said on Friday that “for the time being”, Greek bonds would no longer be eligible as collateral for the central bank’s regular operations.

    The ECB, which along with the IMF and the European Commission forms the so-called “troika” of lenders to Greece, said it would assess the eligibility of Greek debt after the troika had finished its review on Athens’ progress in implementing its second bailout programme.

    “They’re playing hardball. It’s a message to the new government that it has to get its act together on reforms,” one senior banker said. “But there may be negative results . . . We’ve recently seen a good flow of deposits returning to banks, helping with liquidity, but that could easily stop.”

    Depositors pulled more than €10bn from Greek banks ahead of the June election amid fears of deepening political instability and a “Grexit” from the eurozone. About half that amount has returned after the formation of a three-party coalition government that pledged to accelerate promised reforms.

    The ECB’s move will force Greece’s beleaguered banks to seek emergency liquidity assistance (ELA) – funding that is made available from the Greek central bank but at a far higher cost than loans secured from the ECB. Analysts estimated that Greek banks would seek up to €50bn in ELA on top of €62bn already drawn under the programme.

    James Ashley, an economist at RBC Capital Markets, said: “It’s hard to see how the troika can report back positively on Greece. It looks as though ELA is now going to become the primary source of funding for the country’s banks.”

    The pressure on the Greek government comes as it faces a €3.1bn bond repayment to the ECB on August 20, funds Athens will struggle to scrape together since eurozone finance ministers have said they will not decide on the next Greek aid payment until September.

    Greek government officials have hinted that they will try to seek a bridge loan, but EU officials have been resistant. According to one senior EU official, Athens is likely to be forced to raise the money on the short-term Treasury bill market, which would come with high borrowing costs.

    It is the second time this year that the ECB has effectively refused Greek banks access to its cash. The central bank in May banned the use of Greek bonds as collateral after Athens delayed a recapitalisation of its banking system. The ECB had argued that until lenders received more capital, they were insolvent. Once the recapitalisation took place, Greek banks could return to the ECB.

    National central banks must cover any losses incurred through ELA, whereas in the case of ECB loans, losses are shared. One analyst said: “It’s a two-pronged move by the ECB: they protect themselves from Greek risk while sending a strong message to the government.”

    There was no immediate comment from the coalition, although Antonis Samaras, the prime minister, discussed Greek and European economic developments on Friday in a telephone conversation with Mario Draghi, the ECB president.

    Mr Samaras also discussed the Greek economy in a call to Christine Lagarde, the IMF managing director, ahead of next week’s critical monitoring mission to Athens by EU and IMF officials, an official statement said.

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