ECB draws line in sand over Greece

[FRANKFURT] By taking a tough line on Greece, the European Central Bank is sending a signal that while it has repeatedly charged to the eurozone's rescue in the past, it is no longer willing to do governments' work for them, analysts said Thursday.

"The ECB has drawn a line. It is an attempt to remain independent," said Bert Van Roosebeke from the Centre for European Policy in Freiburg.

During the long years of crisis, the ECB has never hesitated to take on the role of firefighter, cutting its key interest rates time after time and taking a series of controversial and increasingly bold unconventional policy decisions to prop up the eurozone economy.

Nevertheless, all through such action, ECB chief Mario Draghi has consistently argued that in order to solve the crisis, governments must get their finances and economies in order and not hide behind the ECB.

Hence, the ECB's announcement late Wednesday that it would no longer accept Greek government bonds - currently rated as junk - as collateral for loans offers a taste of the ECB's bitter medicine, analysts said.

The news certainly rattled investors.

In early trading on Thursday, Europe's stock markets were lower, with the Greek stock market plunging more than nine percent, and the euro also fell. At the same time, Greece's borrowing rate soared above the symbolic level of 10 percent.

The ECB announcement came all the more as a surprise because it was issued just hours after Athens new Finance Minister Yanis Varoufakis had met central bank chief Mario Draghi in Frankfurt, talks which Mr Varoufakis himself had described as "fruitful" and "encouraging".

But despite the immediate shock, analysts said there was no danger, at least for now, of Greek banks facing a liquidity crisis.

Greek debt has a junk credit rating and, under ECB rules, should not qualify as collateral for loans, anyway.

A special waiver to that rule - accorded to Greece as long as it was deemed to be in compliance with the terms of its 240-billion-euro (US$270 billion) EU-IMF bailout - had been scheduled to expire on February 28.

So the ECB, which argued that it was "currently not possible to assume a successful conclusion of the programme review," had therefore merely pulled the plug two weeks earlier.

But it insisted that Greek banks still had other means of financing at their disposal, such as the emergency liquidity assistance (ELA) facility.

Analysts were therefore confident that Greek banks would still be able to finance themselves.

"It is not likely that Greek banks will face immediate liquidity problems. Greek government debt can still be used to access ELA," said Natixis economist Jesus Castillo.

Greek banks had significantly reduced their holdings of government bonds and did not heavily rely on them as a source for collateral to secure ECB funding, anyway, the analyst noted.

Nevertheless, "the risk is that the ECB's decision will undermine the confidence in the Greek banks, which have already suffered significant deposit withdrawals before and after the January election," Castillo warned.

Bruegel economist Silvia Merler was also concerned that "even if the liquidity consequences could be manageable, the political consequences could be less so."

The move might "formally protect the ECB's independence, but it also forces the political game ... well beyond the limit of a central bank's remit," she said.

Credit Agricole's Frederik Ducrozet saw the ECB decision as a "risky, albeit calculated political move (aimed at) pressuring the Greek government and eurozone policymakers to find an agreement within the next couple of weeks."

Berenberg Bank economist Christian Schulz said the ECB was sending "a strong signal. Instead of the ECB, the Bank of Greece and thus the Greek taxpayer will now be the lender of last resort for banks." Greek Finance Minister Varoufakis was scheduled to meet his German counterpart Wolfgang Schaeuble in Berlin on Thursday.

And the ECB decision had dealt a blow to Greece's negotiating position, Mr Schulz said.

"Greece can hope for some face-saving compromises and modest adjustments at best, but not for a wholesale renegotiation of the adjustment programme," he said.



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