The eurozone sent on Friday its first tangible message to Greece that there is no more room for maneuver and that the bailout agreement must be implemented, as the European Central Bank announced it will not accept Greek bonds as collateral for the supply of cash to local lenders until further notice.
This means that Greek credit institutions will have to cover their liquidity requirements through the Bank of Greece?s emergency liquidity assistance (ELA) program, which was set up for that very purpose.
A few hours after the announcement from Frankfurt, Prime Minister Antonis Samaras had a phone conversation with ECB President Mario Draghi, during which they agreed to meet after August, according to the prime minister?s office.
Besides its strong political message, the ECB decision also has negative financial implications: Given that the use of funds from the ELA is more expensive than liquidity from Frankfurt, the cost of money for domestic lenders is set to rise, and as it will for businesses and households. The ECB had secured liquidity for local banks even though their credit status has sunk to junk.
It is clear that the message to Athens is to implement all agreed measures, identify interventions worth 11.5 billion euros for the next couple of years, and move ahead swiftly with reforms and privatizations — in other words, everything that is set to be scrutinized during the monitoring visit of the representatives of Greece?s creditors — known as the troika — from next week.
This was made quite clear by the ECB in its announcement, when it said that yesterday?s decision will be reviewed after the troika?s inspection in Greece. This means that Frankfurt will only revert to accepting Greek bonds as collateral if it is satisfied with the troika report, expected in the last 10 days of August. The disbursement of bailout tranches to the Greek government will also depend on the findings of the troika mission.