The European Central Bank is threatening to choke off funding to Greece’s lenders in the hope it won’t actually need to.
Parliamentary elections on January 25 hinge on whether Greek voters are willing to accept a strings-attached successor to the country’s international bailout package. Under President Mario Draghi, the Frankfurt-based ECB has made its position clear: No program means no guarantee of cash from us.
Draghi is reprising an ECB tactic honed in the Irish and Cypriot stages of Europe’s debt crisis, where the prospect of vanishing central-bank funds helped prod politicians into action. Amid anti-austerity promises by the SYRIZA party, which leads in polls, the ECB is signaling a willingness to withdraw 30 billion euros ($35 billion) of finance even if it tips Greece into a crisis that ultimately sees it leave the single currency.
“While these things might be threatened, bandied around, it would be remarkable if such a step were actually taken,” said James Nixon, chief European economist at Oxford Economics Ltd. in London. “The negotiation starts off with the threat of mutually assured destruction. But to actually withdraw funding from Greek banks is the sort of thing that would mean Greece is well on the road to exiting the euro.”
Since 2010, the ECB has accepted Greece’s junk-rated government debt and state-backed securities as collateral in its refinancing operations as long as the administration complies with austerity measures and reform pledges in its international aid agreements.
Greek banks rely on those operations for about 45 billion euros of funding. Finance Minister Gikas Hardouvelis has estimated that about two-thirds of that would have to be replaced if the central bank’s exemption is dropped.
The stakes are high, with Hardouvelis telling Bloomberg Television in an interview that Greece could stumble out of the euro if a new government fails to reach an agreement with international creditors soon after the election.
The prospect of a Greek exit “is not necessarily a bluff,” he said in Athens on Monday. “An accident could happen, and the whole idea is to avoid it.”
Time is running out, with the current aid agreement with the European Commission, the ECB and the International Monetary Fund expiring at the end of February. Continuing to suspend normal collateral requirements assumes “a successful conclusion of the current review and an agreement on a follow-up arrangement,” the ECB said in a January 8 statement.
An arrangement such as an Enhanced Conditions Credit Line could be a difficult-enough negotiation for Prime Minister Antonis Samaras. For SYRIZA leader Alexis Tsipras it may be out of reach if he continues to reject austerity measures that would likely be part of an ECCL. He plans to roll back budget cuts to alleviate poverty and might write down some of Greece’s debt.
SYRIZA is on course to get 28.1 percent of votes in the election, compared with 25.5 percent for the premier’s New Democracy, according to a poll by Kapa Research for the To Vima newspaper published on January 10.
Executive Board member Benoit Coeure, who represents the ECB on international matters, told France 24 last week that “whatever the result of the elections, Greece must continue with reforms.”
Even so, the central bank could end up playing a key role. Hardouvelis told To Vima on December 27 that if “extreme” anti-European forces prevail in Greece, the ECB could cause the “asphyxiation” of the economy.
One remedy for banks facing the loss of ECB cash in the past has been an escape hatch known as Emergency Liquidity Assistance. That’s an instrument Greece, which used ELA in 2012 during its 100 billion-euro debt restructuring, is about to get a taste of again, regardless of its election outcome.
As of March 1, the ECB will no longer accept some forms of uncovered government-guaranteed bank bonds from any euro-area issuers. Cash-strapped Greek lenders will probably have to plug the gap with ELA. While the funds are provided at the national central bank’s own risk, they must be approved by the ECB, still giving it leverage.
In November 2010, as Ireland prevaricated over whether to ask for a European bailout, a letter from then-ECB president Jean-Claude Trichet to the sitting finance minister, Brian Lenihan, helped tip the balance. Citing the “extraordinarily large” ELA to Irish banks, Trichet bluntly said further approval was conditional on a formal aid request.
In Cyprus, after parliamentarians rejected the terms of a bailout offer in March 2013, the ECB gave the country four days to approve an alternative before it revoked funding approval.
Still, concern over Cyprus’s use of ELA has since curbed the ECB’s enthusiasm. The Governing Council has said it will consider whether provisions of more than 2 billion euros to any lender or banking group “may interfere with the objectives and tasks of the Eurosystem.”
That’s an issue in Greece, where lenders are among the most heavily reliant on central-bank funds. Refinancing accounts for about 11 percent to 12 percent of the national banking-sector balance sheet, according to ECB data.
That percentage would rise if Greek depositors increase withdrawals amid the political uncertainty. Net withdrawals were about 3 billion euros in December and have accelerated since then, according to a Greek banker with knowledge of the matter.
Hanging over the whole debate is how the country would be handled should the ECB decide to start buying government bonds to fight the threat of deflation in the euro area. Policymakers will consider a QE package in Frankfurt on January 22.
“I’d personally find announcing a bond-buying program including Greek government bonds in January problematic,” Governing Council member Ardo Hansson told Bloomberg News in an interview last week. “When there’s a chance that somebody will come and say I’m going to restructure our debt, committing to buy such bonds is near borderline of what could be considered.”
Greek voters and the new government will eventually have to decide how far they are prepared to try to roll back austerity efforts before the ECB objects.
“It will not be in Tsipras’s interest to set his government on a collision course with the ECB,” George Pagoulatos, professor of European politics and economy at the Athens University of Economics and Business, said by phone. “But in order for a potential SYRIZA government to make a U-turn, we’ll first see brinkmanship and edge-of-the-cliff diplomacy.”