ECB decision on Greek haircuts said to depend on political talks

The European Central Bank will decide after next week’s meeting of euro region finance ministers whether to tighten Greek access to emergency liquidity, two people familiar with the matter said.

The ECB is prepared to raise the discount demanded on Greek collateral to a level last seen in 2014 unless the country’s government shows a willingness to compromise in bailout talks, said one of the officials, who spoke on condition of anonymity. An ECB spokesman declined to comment.

The Governing Council’s stance adds pressure on Prime Minister Alexis Tsipras to make progress with creditors at Monday’s meeting of finance ministers in Brussels, or risk watching his country’s banks being pushed deeper into crisis. Such is the rate of deposit withdrawals that ECB officials meeting Wednesday in Frankfurt raised their cap on Emergency Liquidity Assistance by 2 billion euros to 78.9 billion euros, the people said.

The ECB also wants to ensure Greece makes a 767 million- euro ($870 million) payment to the International Monetary Fund due on May 12, one of the officials said.

The central bank decided in October to reduce the risk premium charged on Greek securities, citing “overall improved market conditions” for the assets at the time. Since then, the government has changed and the incoming administration has stalled on the reforms needed to access its bailout funds.

Tougher Options

Early this year, the ECB suspended a waiver on collateral requirements for Greek debt, forcing banks to rely more on ELA from their own central bank. Increasing the haircuts now would force lenders to post higher collateral in exchange for funding.

Even so, more draconian ideas have been floated. An internal ECB proposal circulated in April contained an option that would see haircuts raised to as high as 90 percent, a level consistent with Greece being in default.

Euro-area central bankers are concerned about Greece’s solvency as debt repayments loom, though they remain reluctant to act before politicians have had a chance to salvage the bailout program.

Most Governing Council members, led by President Mario Draghi, argued that it would be unfair to restrict access to liquidity before the outcome of Monday’s meeting is clear, one of the people said.

The mood over the talks has improved since Greek finance minister Yanis Varoufakis was sidelined by a new negotiating team under Deputy Foreign Minister Euclid Tsakalotos.

Germany’s View

Germany’s impression is that the political discussions are running on “reasonable and constructive” lines, German Finance Ministry spokeswoman Friederike von Tiesenhausen said at a regular press conference in Berlin on Wednesday.

Negotiations between creditors and Greek authorities have made good progress, an EU official said, adding that there is convergence in areas including pension changes, privatizations and energy reform. The official spoke on condition of anonymity because the talks are private.

Still, Greek bonds dropped after Tsipras’s government blamed international creditors for a failure to end the impasse. A government official said on Tuesday, before a Greek delegation led by Deputy Prime Minister Yannis Dragasakis met with Draghi, that no deal would be possible until the European Commission and the International Monetary Fund reduce the number of red lines they’re demanding.


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