The European Central Bank is embarking on a third tour of duty in Athens, with victory less certain than ever.
Officials holding a telephone call on Wednesday to discuss the Emergency Liquidity Assistance that keeps Greece’s financial system alive will be mindful that their decision is just a precursor to a bigger task. They’re about to send a team back to the Greek capital to monitor compliance with austerity policies – honed over two previous rescues since 2010 – that the government accepted in return for a bailout deal.
The ECB has an interest in seeing Greece make good on its commitments, as the institution is embroiled there on multiple fronts from saving the banks to deciding when to include the nation in monetary stimulus. If the government of Prime Minister Alexis Tsipras fails to convince on reforms, the ECB will once again be burdened with the dilemma over whether it’s obliged to let the lenders collapse.
“There’s a bit more political will this time around because of how bad things got, but you also have the offsetting factor of having SYRIZA in charge who have no ownership of the program,” said Raoul Ruparel, co-director of Open Europe, a London-based research group. “Then you get the question: they failed the review and on the reforms, so do we release the cash or not?”
The Governing Council will decide on Wednesday whether to raise the cap on ELA from the current 89.5 billion euros ($98 billion), and for how long. An ECB spokesman declined to comment on the timing of the call.
President Mario Draghi persuaded his colleagues to raise the limit by 900 million euros last week, the first increase since late June, after the country’s parliament passed prior actions that allow talks to start on an aid package worth as much as 86 billion euros. The extra liquidity helped Greek banks reopen on Monday for basic services, though capital controls remain in place.
While the ECB could raise ELA again immediately, it also has room to take further steps should implementation of the reforms go well. That could take weeks or months, according to economists in a Bloomberg survey.
Fifty-nine percent of respondents said the ECB will lower the discounts imposed on the collateral banks post against ELA no earlier than September. At the same time, almost 90 percent expect Greek government and government-guaranteed debt to become usable again for normal ECB operations by the end of the year. That step would also clear the nation’s securities to be included in the central bank’s quantitative-easing program, potentially curbing borrowing costs.
The ECB will monitor Greece’s aid program along with the European Commission and International Monetary Fund — the group formerly known as the troika. Draghi says he’ll work on the assumption that the Greek government will do as it’s pledged, while acknowledging that it might not.
“No matter who you talk to, there are, I would say, questions about the implementation, will and capacity,” he said at a press conference in Frankfurt on July 16. “Would you think it is legitimate for the ECB to take its decisions based on doubts about a government’s capacity to implement the measures? That’s not for us.”
Tsipras returns to the Greek parliament on Wednesday to seek support from opposition parties on measures that parts of his own party won’t accept. A vote on two pieces of legislation required by creditors to qualify for bailout negotiations is expected in Athens around midnight.
While the ECB’s monetary-policy arm will focus on liquidity and whether or not the Greek government shows the “credible compliance” with its program needed to be a part of QE, the central bank’s supervisory arm will be preparing for a stress test of the nation’s banks.
That could lead to restructuring or resolution of one or more of the lenders – another potential area of conflict.
On Tuesday, the ECB criticized the government’s draft law on transposing European bank-resolution rules, saying they gave too much discretion over technical questions to political authorities at the expense of the Greek central bank. That legislation is due before parliament Wednesday, along with an overhaul of the Code of Civil Procedure.
The ECB’s multi-layered involvement in the bailout, in a country which rejected the austerity measures in a referendum, means officials need more than ever to explain why the structural reforms are needed, according to Karsten Junius, chief economist at Bank J Safra Sarasin Ltd. in Zurich and a former IMF economist.
“The problem that I see is that the ECB is a technical institution and hasn’t been assigned a clear political role, so here we have a vacuum,” he said. “We have to face the situation where 61 percent voted against a troika program. It means that the people don’t understand why all these reforms are needed. If there’s no public acceptance of reforms, then you’ll never see them.”