Banks relieved to hear their collateral is intact, as ELA grows

The European Central Bank raised the emergency liquidity assistance (ELA) ceiling for Greek banks by 1.1 billion euros on Tuesday, in the wake of Monday’s Eurogroup meeting that recorded some progress in the talks between the government and its creditors.

Frankfurt’s position was seen as neutral. On the one hand it did not follow through on its threat to increase the haircut on the value of Greek banks’ collateral, which would have had serious implications on liquidity, but on the other the ECB poured cold water on the government’s expectations that Frankfurt would increase the amount banks are allowed to use for buying treasury bills after the progress recorded at the Eurogroup, which would have eased the country’s cash crunch.

Local banks were relieved to hear their collateral remained intact on Tuesday despite the effort by certain ECB board members to push for a haircut. The eurozone’s central bank has apparently completed technical preparations for an increase on the haircut from the current 23 percent to anything from 44 percent up to 80 percent. Bank officials say that a haircut increase would effectively deprive the local system of access to Eurosystem liquidity.

The ECB board will meet again next week to discuss Greece’s issues again, after raising the ELA limit from 78.9 to 80 billion euros yesterday. Banking sources say that after the new increase the Greek credit system has a cash cushion of 3.5 billion euros in unused liquidity, following a increase in the deposits outflow last month reported by the same sources.

So far, Greek banks have been forced to draw a total of 120 billion euros from the Eurosystem, which amounts to about 50 percent of their assets.

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