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Greece pins hopes on ECB for financial lifeline
[FRANKFURT] Greece is counting on the European Central Bank to continue to supply its banks with cash while Athens battles with its European partners and creditors over the terms of its bailout.
Analysts said the ECB is, in fact, the lynchpin to resolving Greece's new debt crisis and ensuring there is no so-called "Grexit" - or exit from the eurozone - that everyone fears.
On a visit to Paris on Sunday, Greek Finance Minister Yanis Varoufakis said Athens is relying on the ECB to maintain a financial lifeline while his week-old government negotiates new bailout terms.
Kicking off his diplomatic charm offensive, Mr Varoufakis also said Greece did not want the next promised loan tranche of 7.2 billion euros (US$8 billion) in funds from the European Union, International Monetary Fund and the ECB.
"It's not that we don't need the money; we're desperate," he said at a joint press conference with his French counterpart Michel Sapin.
But until new bailout terms with creditors are agreed, "it is perfectly possible in conjunction with the ECB to establish the liquidity provisions that are necessary," Mr Varoufakis said.
Greek banks are dependent on ECB cash and, under normal monetary operations, can borrow from the ECB in return for part of their holding of Greek government debt as security or collateral.
The snag here is that Greek debt has a junk credit rating and, under ECB rules, should not qualify as collateral for emergency loans.
For the time being, Greece and its banks have been granted a waiver to that rule as long as Athens is deemed to be in compliance with the terms of its eurozone-IMF bailout.
But if it were ever decided that Greece is in breach of bailout conditions, Greek banks would no longer have access to money from the ECB.
That would likely trigger a run on Greek banks as depositors rush to withdraw their money; banks would no longer be able to swap Greek government debt for euros from the ECB; and Greece would have to default on its debts.
The eurozone system of national central banks does provide another facility to ensure bank funding, known as emergency liquidity assistance (ELA).
And that mechanism was evoked by ECB vice president Vitor Constancio at the weekend, Bloomberg News reported.
"There is the possibility of so-called ELA. In any case that will be ultimately a decision of the governing council, which I don't want to predict at this stage," Constancio said during a question-and-answer session at Cambridge University.
Under the rules of the eurozone system of central banks, ELA can be made available "to a solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems." Responsibility for the provision of ELA lies with the national central bank concerned, in this case the National Bank of Greece. And it must bear any costs of, and risks arising from, the provision of ELA, the rules state.
A Greek banking source told AFP that the ECB's governing council would meet on Wednesday to decide whether to make ELA available to Greece. But the ECB itself declined to comment.
Athens is relying on its banks for its immediate financial needs. The government is scheduled to issue 625 million euros of six-month debt on Wednesday and its banks will be the main buyers.
"If the Greek banks don't have sufficient funds from the ECB, they won't be in a position to buy the paper and Greece could find itself in trouble pretty quickly," said Natixis chief economist Sylvain Broyer.
"The ECB's role is therefore crucial," he said.
The expert said banks had recently requested 5.0 billion euros in ELA and it was that request that would be examined by the ECB governing council at its meeting on Wednesday.
Mr Broyer said it would be difficult for the ECB to say no without plunging Greece into a liquidity crisis.
"And that's not in the ECB's interests at all," he said.
Credit Agricole analyst Frederik Ducrozet suggested the ECB could invoke the threat of cutting off financing in a bid to push Athens into making concessions.
"But it has room for manoeuvre," the analyst said.