PM concession keeps ELA alive

The European Central Bank is putting extra pressure on Athens for the completion of an agreement with creditors, pegging the maintenance of liquidity supply to Greek lenders on a clearly positive decision by next Monday’s Eurogroup meeting of eurozone finance ministers.

In its board meeting on Wednesday the ECB approved the renewal of the cash supply to local banks via emergency liquidity assistance (ELA) and its extension by 2 billion euros, but most of the discussion focused on the increase in the haircut on the collateral Greek banks use to draw cash with. Such a move would amount to stopping the cash flow and lead to the imposition of capital controls, with a dramatic impact on Greek households and corporations.

The ECB pressure, which emerged during Tuesday’s meeting between Greek officials and governor Mario Draghi, according to sources led the prime minister to concede to reforms in the social security and labor domains on Wednesday. That happened just before the ECB meeting started. A little later it became known that the ELA limit had risen from 76.9 to 78.9 billion euros.

Bank officials are insisting on the crucial need for a positive outcome from Monday’s Eurogroup. They stress that a final agreement cannot be expected but that there should be a resounding common statement on the progress and determination of both sides to seal the deal. The Greek side will also be asked to submit a specific list of actions and a timetable, the fulfillment of which will be necessary for the renewal and extension of ELA.

The European Central Bank appears technically ready to proceed with a haircut increase for Greek bank collateral from the current 23 to 44 percent, or even 65-80 percent, depending on political developments.

In the case of a 44 percent haircut, a Greek bank would need to present 100 million euros in collateral in order to draw 56 million euros in cash from the Bank of Greece’s ELA mechanism.

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