The European Central Bank heaped pressure on Greece’s new government by restricting access to its direct liquidity lines, citing concerns about the country’s commitment to existing bailout pledges. The Frankfurt-based institution, responsible for oversight of euro-area lenders and monetary policy in the currency bloc, announced Feb. 4 that the junk- rated collateral offered by Greek banks in return for financing will no longer be accepted, leaving them dependent on emergency liquidity assistance for funding.
Here’s a list of frequently asked questions about ELA:
Q: What is ELA? A: Emergency Liquidity Assistance, or ELA, is extended by a national central bank of the euro area, in this case the Bank of Greece, to solvent lenders “facing temporary liquidity problems, without such operation being part of the single monetary policy,” according to the European Central Bank’s website.
Q: Who approves the provision of ELA funds? A: Even though ELA is extended by a national central bank, the ECB’s Governing Council can restrict “ELA operations if it considers that these operations interfere with the objectives and tasks” of the euro-area system of central banks, or Eurosystem. “Such decisions are taken by the Governing Council with a majority of two-thirds of the votes cast.”
Q: Is ELA free assistance? A: No, ELA liquidity carries an interest rate of 1.55 percent, versus 0.05 percent for regular ECB financing, the Governor of the Bank of Greece Yannis Stournaras said in November.
Q: Why did Greek banks have to seek ELA? A: 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 government complies with austerity measures and reform pledges in its international aid agreements.
The Governing Council decided Wednesday to end the waiver “based on the fact that it is currently not possible to assume a successful conclusion of the program review.”
Q: How much ELA will Greek banks get? A: Two Eurosystem officials said that Greek banks will have to convert well over 30 billion euros ($34 billion) of their ECB financing into more expensive ELA financing.
Q: Have we been here before? A: This is not the first time Greek banks have used ELA. Like Cypriot banks, they had to use ELA at the peak of the euro-area debt crisis. Greek banks only escaped the shackles of ELA in April 2014.
Q: Why did Greek lenders seek ELA again? A: Uncertainty over Greece’s future in the euro area triggered massive deposit outflows, totaling more than 15 billion euros since the beginning of December. Also, Greek banks lost access to financial markets. ELA is their only lifeline allowing them to replace lost liquidity.
Q: Is this the end? A: Certainly not. Greek banks have been here before, and so have banks of other euro-area member states. ELA won’t affect everyday operations and depositors and clients won’t notice a difference in their transactions.
ELA is an expensive temporary solution, however, subject to biweekly review by the Governing Council of the ECB. It gives Greek banks support until the country and its creditors solve their financing issues and strike a deal. If uncertainty persists, and deposit outflows accelerate, the Governing Council may decide that the problem is not liquidity, but the solvency of lenders. And then ELA will stop.