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ECB, financial linchpin in Greece debt talks

Officially, the European Central Bank is not a political institution, but in keeping Greece's banks afloat, it has become a linchpin in the negotiations between Athens and its creditors.

[FRANKFURT] Officially, the European Central Bank is not a political institution, but in keeping Greece's banks afloat, it has become a linchpin in the negotiations between Athens and its creditors.

And it is a role which sometimes stretches the mandate of the ECB to its very limit, observers say.

Greece needs to unlock the last 7.2 billion euros (S$10.7 billion) of its EU-IMF bailout before it expires on June 30 in order to meet a 1.5-billion-euro IMF loan repayment due on the same day, or risk defaulting.

But if Greece were to default on its payment to the IMF, the ECB - which is the lifeline keeping Greek banks, and by extension the Greek state, afloat - "would not be able to not react," said a banking source.

Given the dire state of its finances, Greece currently has no access to the financial markets and is solely dependent on its banks for financing.

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But the banks, in turn, cannot fund themselves via the ECB's normal refinancing operations, because they are barred from using junk-status Greek governments bonds as collateral.

So, for months now, the Greek banks have been compelled to turn to the eurozone's Emergency Liquidity Assistance (ELA) for cash.

Last week, ECB chief Mario Draghi said the central bank liquidity extended so far to Greek banks amounted to around 118 billion euros or around 66 per cent of Greece's gross domestic product (GDP) and the highest level as a share of GDP of any euro area country.

But the ongoing provision of emergency liquidity is starting to raise eyebrows because, under eurozone rules, ELA is a temporary facility aimed at banks that are fundamentally solvent.

And in Germany, in particular, the central bank or Bundesbank is sceptical whether ELA is allowed on such an open-ended basis.

The ECB's 25-member governing council reviews the situation frequently to decide whether to keep the ELA pipeline open, but acording to media reports, Bundesbank president Jens Weidmann is now voting against it.

On Wednesday, a Greek bank source said the ECB increased the ELA ceiling again for the fifth time in eight days as Greek savers continued withdrawing their money in large volumes from the country's stricken banks.

Greece's central bank said Greek business and private bank deposits have fallen by nearly 30 billion euros between December and April, to 128 billion euros.

Effectively, "the ECB is the sole European body that can pull the plug" on the Greek economy, said Matthias Kullas of the Center for European Policy (CEP) in Freiburg.

If two-thirds of the governing council voted to shut down ELA, Greece's banks would no longer be able to refinance themselves. That would choke off financing for Greece as a whole, and eventually push the country out of the single currency area.

But that is a horror scenario for the ECB.

As a organisation which is not democratically elected, the ECB finds itself in an "uncomfortable position," Mr Kullas said.

So, until Greece and its creditors find a way out of their current deadlock, the ECB's hands are tied and it is effectively compelled to keep on approving ELA so as not to let Greek banks - and in turn the entire country - go under.

"As always, (the ECB) is the lender of last resort," said Martin Hellmich, professor for financial risk management at the Frankfurt School of Finance.

Athens has also repeatedly asked the ECB to raise the ceiling on the amount of short-term treasury bills it can issue to give it additional financial breathing space.

But ECB chief Mr Draghi is adamant that that can only be the case if there is "a credible perspective" for a deal between Greece and its creditors. And here, the ball was firmly in the politicians' court, Draghi said.

"This is a political decision that will have to be taken by elected policymakers, not by central bankers," he said.

But if a deal is indeed reached by June 30, the ECB, as the only European body capable of moving fast enough, could step into the breach again and allow Athens to issue more T-bills and temporarily fill its empty coffers, a European source suggested.


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