The European Central Bank is examining ways of reducing the supply of liquidity to Greek banks, according to a report from Bloomberg on Tuesday. This could be done by increasing the haircut imposed on Greek collateral used for drawing cash from the Eurosystem.
According to sources, ECB technocrats have processed three alternative scenarios for increasing the collateral haircut. If a significant increase were implemented, it would severely reduce local lenders’ capacity to cover the loss of capital – through the flight of deposits – via the emergency liquidity assistance (ELA) mechanism. Some banks could even face a dead end as it is doubtful whether they possess any more collateral.
A further increase in the haircut would not only concern new collateral supplied but also previously submitted collateral, effectively leading to a halt in the cash flow to local lenders and therefore the imposition of capital controls.
Up until now, Greek banks have tapped an estimated 74 billion euros through ELA and another 38 billion euros through the ECB. The total of 112 billion euros exceeds 50 percent of their assets.