European Central Bank policymakers decamp to Cyprus on Wednesday wrestling with the uncomfortable fact that they may hold the keys to Greece’s continued membership of the euro.
With no political appetite for a ‘transfer union’ that could see wealthier countries subsidize Greece, the central bank figures prominently among the main options for staving off an impending funding crunch in Athens.
This is awkward for the ECB, an independent central bank desperate to stay out of the political debate over Greece’s future but whose lender-of-last-resort function may leave it as the only institution able to stop an economic collapse there.
“The ECB is justified in being cautious because of the highly political exposure,» said Richard Portes, professor of economics at London Business School, noting that the bank has just completed a sensitive, political debate over a sovereign bond-buying plan.
After that debate, the ECB sought to remove itself from the political firing line. Observing its rules strictly, the ECB cut off Greek banks from its funding after Athens abandoned its bailout program, a condition for access to the ECB funds.
The move forced Greek banks onto emergency liquidity assistance (ELA) from their national central bank — a temporary facility that raised the pressure on governments to find a political solution before the banking sector tipped into crisis.
ECB President Mario Draghi defended the move in an at-times heated exchange at the European Parliament last week, telling lawmakers: «The ECB had no choice». The discussion illustrated the ECB’s sensitivity to the Greek question.
Now another looming funding crunch, this time for the Greek government, means the 25 members of the ECB’s policymaking Governing Council have little option but to enter the political arena due to their say over key funding operations.
The Council meets in Cyprus on Wednesday and Thursday.
Shut out of debt markets and faced with a steep fall in tax revenues, Athens is expected to run out of cash by the middle or the end of March. Without unlocking bailout funds by completing — or at least beginning — reforms it has vocally opposed, the government faces the prospect of defaulting in a matter of weeks.
With other options apparently closed for now, the ECB is central to the Greek government’s only other prospective funding channel: raising a 15 billion euro ($16.82 billion) cap on Athens’ issuance of Treasury bills, or short-term debt.
The cap has already been reached, and the ECB has a veto over lifting it. The issue here is that Greek banks have used the T-bills to access central bank funding and then invest in more T-bills, helping the state cover its short-term needs.
Raising the T-bill limit would be tantamount to putting central bank cash in the pocket of the Greek government. The ECB is prohibited from such central bank financing of governments.
One person familiar with ECB thinking said that any extension of the T-bill limit was «very unlikely».
Although they are eager to avoid playing a decisive role in Greece’s fate, euro zone central banking officials fear Greece could stumble into an accidental exit from the bloc by defaulting without any form of back-up plan.
Greek Finance Minister Yanis Varoufakis spoke at cross purposes with Draghi and other top ECB officials when they met in Frankfurt early last month.
Hawkish euro zone central bankers are growing impatient with Athens and its reliance on central bank funding, with some wanting to restrict this financing to Greece regardless of the consequences.
“I would agree with the theory that if you get rid of the rotten apple, then the others are more in line,» one central bank official said.