FRANKFURT (Reuters) – The European Central Bank’s control over emergency funding for banks gives it the power to prod countries into the kind of aid-and-reform programme that Greece is desperate to escape.
The ECB is loath to pull the plug on Greece’s banks, a scenario that would almost certainly lead to the country’s exit from the eurozone. But if Athens refuses to extend the existing programme or sign up to a new one it may have little choice.
Time is short, and the ECB has Greece on a tight leash.
On Thursday, the ECB raised the Emergency Liquidity Assistance (ELA) available to Greek banks by about 5 billion euros ($5.7 billion) to 65 billion, extending the funding until Wednesday, when it will reassess the situation.
The ECB has already stopped accepting Greek bonds in return for funding, shifting the financing burden onto Greece’s central bank. However, the ECB retains control over that ELA funding, which is subject to tight conditions.
“If the Greek government says ‘we are not paying our debts’, then the banks are actually insolvent, because they hold a lot of Greek sovereign bonds,” said Volker Wieland, a member of the German government’s Council of Economic Experts.
The rules governing ELA stipulate that the eurozone’s national central banks can only grant such funding temporarily, and to solvent banks.
Denying Greek banks this funding “would be a way to bring Greece to an agreement quickly,” said Wieland.
This is a tactic the ECB has used before.
In March 2013, with Cyprus unwilling to accept the conditions for unlocking EU aid, the ECB set it a tight deadline to agree a bailout plan, threatening to cut off ELA funding to its banks. That quickly brought Cyprus to heel.
By contrast, Ireland used ELA to prop up its banks for months before the ECB agreed to a deal to ease its bank debts. But it also swallowed a severe dose of austerity medicine.
That made it a role model for the eurozone’s debt-ridden economies – something that Greece’s leftist government, with its anti-austerity demands, is clearly not.
The ECB’s Governing Council, which will reassess the Greek ELA on Wednesday, can restrict the funding operations if a two-thirds majority is in favour.
Some Council members’ patience is wearing thin. Executive Board member Peter Praet said last week that ELA is “only for very short needs” and stressed the rules on provision to solvent banks should be applied. Bundesbank chief Jens Weidmann has called for “strict standards with ELA”.
Taking a strict approach would leave the ECB in an awkward position if Greece failed to agree a programme at Monday’s meeting of eurozone finance ministers but nonetheless remained in the eurozone.
“If Greece does not sign up to a programme but it’s still in the eurozone, it is basically in a state of limbo,” said Andrew Bosomworth, a senior portfolio manager at Pimco in Munich.
ECB Governing Council member Ewald Nowotny said on Thursday a lack of agreement on a programme would “definitely not” automatically see Greece’s banks cut off from ELA.