ECB package set to appease hardliners and the markets

The European Central Bank has drafted a plan to increase the haircut on the value of Greek banks’ collateral, used to draw liquidity from the emergency liquidity assistance (ELA), while expanding the criteria for the acceptance of more assets as collateral. Such a package would have a neutral impact on Greek bank liquidity, bank officials estimate.

Sources say that Frankfurt may proceed with a small increase to the collateral’s haircut that will have no major impact on the capacity of local lenders to get cash from the Eurosystem. That would satisfy a strong block within the ECB, which for weeks has been putting pressure for an increase of the haircut due to the significant deterioration of financial conditions in Greece – with repeated credit rating downgrades – and the inability of Athens to reach an agreement with Greece’s creditors.

At the same time the ECB will broaden the list of assets it accepts as collateral from Greek banks, thereby easing the pressure on domestic lenders and appeasing the markets, which fear a liquidity accident with unforeseeable and dramatic consequences.

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