European Central Bank Governing Council member Christian Noyer indicated policy makers can grant more liquidity assistance to Greek banks provided the funds aren’t used to finance the government.
Greek banks were cut off from regular ECB funding operations in February, forcing them to rely on Emergency Liquidity Assistance from the country’s central bank. The Frankfurt-based ECB has the power to curb ELA and is reviewing it weekly amid concern that banks will use it to finance the Greek government and so violate European Union law.
“We want ELA to provide the necessary liquidity for banks to be able to finance the Greek economy,” Noyer said. It “cannot be designed to cover the financing needs of the government,” though the rest of the economy shouldn’t suffer a shortage, he said.
The ECB raised the maximum amount of emergency liquidity available to Greek lenders by 400 million euros ($435 million) on March 18, people familiar with the decision said. That was less than the 900 million euros that Greece had requested.
Noyer also cautioned that Greece should only turn to capital controls to halt the outflow of private funds when all other options are exhausted.
Capital controls are “really a tool of last resort,” he said. “The government should do everything to restore confidence among the corporates and the households and set a clear path of restoring economic competitiveness,” in which case the flow “will simply disappear.”
Greece’s newly elected government could run out of money as soon as this month as it tries to agree the terms under which euro-area governments will disburse aid payments. The region’s finance ministers are urging Greece to draw up a plan to fix the economy in exchange for emergency loans, while Prime Minister Alexis Tsipras, who will meet with German Chancellor Angela Merkel later, is challenging creditors to blink first.
The country faces more than 2 billion euros in debt payments on Friday, and government salaries and pensions must be paid at the end of March.
As bailout disbursements have ceased, the Greek state covers its cash deficit by rolling over treasury bills, forcing the country’s banks to make a choice between participating in liquidity-draining auctions or letting their sovereign default. [Bloomberg]