The European Central Bank is studying measures to rein in Emergency Liquidity Assistance to Greek banks, as resistance to further aiding the country’s stricken lenders grows in the Governing Council, people with knowledge of the discussions said.
ECB staff have produced a proposal to increase the haircuts banks take on the collateral they post when borrowing from the Bank of Greece, the people said, asking not to be named as the matter is private. While the measure hasn’t been formally discussed by the Governing Council, it may be considered if Greece’s leaders fail to quickly convince euro-area finance ministers they can reform their economy and secure bailout funds, one of the people said.
Greek lenders are mostly locked out of regular ECB cash tenders while the country’s government, which holds talks with euro-area partners in Riga this week, tussles with its creditors over the much-needed aid payments. Instead, the banks currently have access to about 74 billion euros ($79 billion) of emergency funds from their own central bank — an amount that has been rising and which will be reviewed this week.
There’s “no doubt” that the ECB is losing patience with Greece, said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “Greek banks will need more funding before long, so in a way larger haircuts or a lower ELA cap are equivalent.”
The FTSE/Athex Banks Index slid 1.3 percent at 10:37 a.m. Athens time. The euro fell 0.7 percent to $1.0668.
The ECB staff proposal outlines three routes for reducing the amount of cash lenders can access for a given amount of collateral, one of the people said. The haircuts set under ELA operations aren’t public. An ECB spokesman declined to comment.
Officials are viewing the Latvian meeting of euro-area finance ministers and central-bank governors as a test of the Greek government’s willingness to make the economic reforms demanded of it in return for the final payments of its 2012 bailout package. Without fresh funds, the government may run out of money by May.
As Greek depositors pull cash from bank accounts amid uncertainty over the country’s future in the currency bloc, the central bank seeks to match the outflow with ELA. The Bank of Greece keeps a buffer of around 3 billion euros of ELA allowance in reserve, to give it time to react to a possible bank run, one of the officials said.
The Frankfurt-based ECB has insisted on tight control of the operations, on concern banks will use the cash to directly fund the government in contravention of European Union law.
Even so, ECB President Mario Draghi has signaled he isn’t yet convinced of the need to squeeze Greek lenders further. Speaking to reporters on April 15, he said the subject was “mentioned, not discussed” by governors at their monetary-policy meeting. “We will come back on this issue in due time,” he said.
Running out of options to keep his country afloat, Greek Prime Minister Alexis Tsipras told local governments on Monday to move what may be about 2 billion euros in funds to the local central bank. If sufficient, the government may use the cash to pay salaries and to meet an International Monetary Fund loan repayment due on May 12. That shift of cash will also probably increase banks’ need for replacement central-bank funding.
To restrict or veto ELA funding, which is provided at the Greek central bank’s own risk with consent from Frankfurt, a two-thirds majority of the Governing Council is necessary. A growing minority is opposed to continuing to provide the assistance indefinitely, one of the people said.
“The situation in Greece means that we should have a limit until summer for ELA,” Governing Council member Vitas Vasiliauskas said in an interview in Washington on April 18. “Everyone understands what ELA means; it’s a temporary measure to give the banks liquidity.”
Those comments echo concern over the risks inherent in ELA funding voiced repeatedly by Jens Weidmann, the head of Germany’s Bundesbank. Christian Noyer, Governor of the Banque de France, said in Washington last week that emergency assistance can’t last indefinitely.