Weidmann says Greek ELA may breach state financing ban

Bundesbank President Jens Weidmann said the provision of Emergency Liquidity Assistance by the European Central Bank for Greek lenders raises “serious” concerns about monetary financing, which is prohibited under European Union rules.

“When banks without access to the markets buy debt of a sovereign which is likewise locked out of the market, taking recourse to ELA raises serious monetary-financing concerns,” said Weidmann, who sits on the ECB’s Governing Council, in a speech in Frankfurt on Thursday. “The Eurosystem must not provide bridge financing to Greece even in anticipation of later disbursements.”

Weidmann’s remarks came as Greece and its creditors entered a second day of marathon talks in Brussels to secure a deal that would unlock aid money as the country teeters on the brink of default. The ECB, which is reviewing the cap for ELA on a daily basis this week, left it unchanged for a second day on Thursday.

With Greece cut off from global markets, the country’s financial system depends on central-bank liquidity to replace deposits withdrawn amid the political uncertainty over its future in the euro. The specter of default is casting a shadow over the creditworthiness of its banks, whose capital levels and collateral values rely heavily on state guarantees on their assets.

ELA, which was “originally conceived as a temporary source of liquidity for financially sound banks in return for good collateral -– has been provided for a protracted period of time and has become the banks’ only source of funding,” said Weidmann. “This casts doubt on their financial solidity.”

Daniele Nouy, the head of the ECB’s bank-supervisory arm, said on June 7 that “Greek banks are solvent and liquid.” ECB President Mario Draghi has said several times that liquidity will be extended to Greek banks as long as they are solvent and have sufficient collateral. He has also said the ECB is monitoring the situation closely to see if those conditions change.

Weidmann said that, while Greek lenders receive ELA, they should be urged to “do their utmost to improve their liquidity situation and be prevented from worsening it further by rolling over illiquid T-bills of their sovereign.”

Greek banks regularly roll over between 8 billion euros ($9 billion) and 9 billion euros of T-bills, short-term debt which is fundamental to the Greek government’s financing.