Talks will determine ECB’s stance

A few hours after the European Central Bank extended the limit on the cash available to local lenders by another 800 million euros, ECB Governor Mario Draghi on Wednesday reiterated Frankfurt’s determination to support Greek banks in terms of liquidity as long as they remain solvent.

Draghi stressed at a press conference that the supply of liquidity to Greek banks depends on the government and its negotiations with the country’s creditors, stressing that the ECB operates according to specific rules.

However, it was the Italian banker’s reference to the issue of an additional haircut on the collateral that banks supply to draw liquidity that caused a stir. He noted that the ECB has decided to continue following developments closely and review the haircut issue in due course.

A possible increase to the haircut would cause problems with local banks’ smooth funding by the Eurosystem. Bank sources say there is no immediate risk of an increase to the haircut, but some analysts estimate that any downgrading of the credit rating of the Greek economy and the banking system could lead to such a decision by Frankfurt.

Draghi explained that the supply of liquidity to Greek credit institutions will continue as long as they remain solvent and possess the appropriate collateral. He made it clear that no cutoff point has been set for the supply of emergency liquidity assistance (ELA) via the Bank of Greece and added that any increase in the limit depends on market conditions.

Late on Tuesday the ECB decided to raise the ELA cap for domestic lenders from 73.2 to 74 billion euros. At the end of March local banks’ total exposure to the cash flow of the Eurosystem amounted to 107 billion euros, of which 68.5 billion concerned ELA and 38.1 billion regular ECB financing, according to figures released yesterday.

Draghi remarked that the Greek exposure to ECB funding is the biggest among all eurozone countries in relation to gross domestic product. As for the return of the so-called waiver that allowed Greek bonds to be used as collateral for funding despite having junk status in the market, he said that the ECB first needs to be convinced that the Greek assessment will be completed.

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