For Greece, ECB = End Close, Beware

The European Central Bank’s decision on Friday to stop accepting Greek government bonds as collateral was not the first such move made by Frankfurt but there was something distinctly ominous about the timing and implications of its choice.

“The ECB will assess their potential eligibility following the conclusion of the currently ongoing review, by the European Commission in liaison with the ECB and the IMF, of the progress made by Greece under the second adjustment program,” the central bank said.

The ECB has twice before this year refused Greek banks the ability to use government bonds to draw much-needed liquidity. The first was after the bond restructuring, or PSI, and the other was before the start of the bank recapitalization process. In both cases, Greek banks were excluded and had to rely on Emergency Liquidity Assistance (ELA) to gain access to funds. They have reportedly drawn more than 60 billion euros this way.

ELA means that the banks are able to borrow from the Bank of Greece, rather than the ECB, by putting up collateral that is theoretically more risky than bonds, such as small business loans or mortgages. While ELA is a useful stopgap measure, it is no more than that.

First of all, it is not sustainable. ELA funding requires a spread of about 200 basis points above the ECB’s marginal lending facility rate, which is currently at 1.5 percent. This means that cash-strapped Greek banks borrow at about 3.5 percent, more than double what lenders in other eurozone countries are paying.

ELA also spells trouble for the Bank of Greece because it bears the risk of the loans rather than the ECB. If Greek banks are borrowing via the ELA, the ECB and the Eurosystem is less exposed to a default. In the time that Greek lenders drew 62 billion euros from ELA, they have borrowed 74 billion from the ECB, according to Reuters. If there is an underlying intention from Frankfurt to hedge its bets, it doesn’t seem to have done badly.

Finally, ELA leaves Greece’s financial sector at the mercy of the ECB board. The Bank of Greece needs Frankfurt’s approval to accept assets from local lenders. A two-thirds majority decision by the ECB’s governing council could deny Greece’s central lender the right to fund local banks through ELA. ECB politics means that it could only take one or two important members — such as the head of Germany’s central bank, Jens Weidmann, to swing the decision and stop the liquidity program.

However, the technicalities of the ELA are the least of Greece’s worries at the moment. It is the implications of the ECB’s decision that should have the alarm bells ringing in Athens.

While Frankfurt’s two previous refusals to accept Greek bonds this year were linked to specific events and served as a brief parenthesis in the liquidity process, by linking its latest decision to the troika report on Greece, the ECB has opened a bracket without knowing when or if it will be closed.

The troika’s assessment of the Greek program is not due until the end of August and will not be discussed at a European level until September. This is a worryingly long time for Greek banks, which have been losing deposits steadily over the last three years, to be left in this liquidity limbo, cut-off from ECB credit. There must be serious doubts about whether the Greek financial system can survive such a test at this challenging time.

Then, there is the question of what the troika’s report will say and how that will be interpreted by the ECB. This adds one more uncertainty to an already precarious situation. We should be under no illusions; this is how a Greek eurozone exit would occur. A lot of hot air was expelled by politicians on the left and right before the elections with regard to there being no mechanism or treaty regulation that foresees a country’s departure from the single currency but in reality there is no need for one. If the ECB, for whatever reason, decides to permanently cut off Greek banks from funding, the country’s financial system will collapse and Athens will have to start printing money, drachmas in this case. It would be a particularly cruel way to effect a euro exit but this crisis hasn’t been littered with pleasant moments.

The ECB’s stance on Greece over the next few weeks is likely to be the most crucial of all the country’s lenders. Athens has a 3.2-billion-euro bond held by the Frankfurt-based central bank to pay when it matures on August 20. It simply doesn’t have the money to do so and given that there will be no loan tranche due until after eurozone leaders have analyzed the troika’s report in September, it is not clear how this bond will be paid. One option is to extend the maturity by a month, another is to provide Greece with an advance on its next loan tranche, or a bridge loan, while a payment from the EFSF crisis fund to the ECB is also possible. There is, of course, the nuclear option as well: default.

On Friday, European Commission Monetary Affairs spokesman Simon O’Connor said that a “technical solution” is being sought, without going into details. This is unlikely to have filled the Greek government with confidence. The route that is chosen for dealing with this ECB bond will probably provide a good indication of how close Greece is to a euro exit. A loan advance would suggest that the troika is willing to persevere with the Greek case a little longer. Other options would point to deepening skepticism and uncertainty.

There is another implication for Greece from Friday’s ECB decision. With its banks excluded from ECB funding and no bailout tranches due until at least September, Greece will run out of money very soon. An expected 1.3-billion-euro surplus at the end of this month will disappear within days. Greece’s only source of short-term funding would be three- or six-month T-bills. At last week’s auction of three-month bills, Athens raised 1.6 billion euros at a yield of 4.28 percent. A day later, Portugal paid a yield of 2.29 percent for its six-month paper. Greece is already paying a much higher price for its short-term borrowing than other bailout countries even though the bulk of its T-bills are bought by local banks. This tactic means the yields do not fully reflect market strains. However, if Greek banks don’t have access to cash and Greece has to turn to a wider market in August, its borrowing costs are sure to rise. Investors will know that all the other sources of funding available to the government have run dry and will demand a larger premium to buy Greek debt.

It is slightly puzzling that such an onerous decision as rejecting Greek bonds should be taken by the ECB just a couple of days after one of its board members made extremely generous comments about Greece’s fiscal efforts. In what is probably the most positive statement about Greece to come out of the mouth of an ECB official over the last two years, policymaker Joerg Asmussen told Germany’s Stern magazine: “We should show respect for what Greeks are doing. From 2009 to 2010, Greece took fiscal adjustment measures equivalent to 5 percent of GDP. If this was translated to the Germany economy, it would mean saving about 125 billion euros within a year. Something like this would create real problems for any government. So, we should at least say: ‘Well done, it’s a start.’.”

The ECB’s decision on Friday seems in complete contradiction with the spirit of Asmussen’s comment and it may be an indication of where the power balance between the “hawks” and the “doves” in Frankfurt now lies. A decisive shift towards the fiscal conservatives could seal Greece’s fate.

Taking all this into account, the ECB’s policy verdict on Greek bonds carries an unusual political tilt. It appears that Europe’s independent central bank has taken a deliberate political choice rather than an impartial economic decision. Frankfurt has opted for the one policy tool it had that could maximize the pressure on the Greek government at this crucial point. Maybe it is a reminder to Athens that it has yet to conclude its bank recapitalization process, with the questions over the future of ATEbank in particular remaining unresolved. It seems more likely, though, that ECB policymakers are making it clear to Greek politicians their room for maneuver disappeared some time ago. Using the troika review as the pivotal moment is unlikely to be a coincidence.

The mood within Europe has clearly turned against Greece and there is little desire to spend more time or money on resolving the country’s problems. The political will has vanished in many eurozone countries and the bigger threat of a Spanish or Italian derailment is drawing greater attention. Greece has a strong case in its wish for a reworking of the bailout given the deepening recession but the troika does not appear prepared to deviate from the line that has been set. As German Finance Minister Wolfgang Schaueble put it a few days ago, the program will not change because “it has been decided”. What the coalition and many Greeks hoped would be a renegotiation process is shaping up to be a straightforward case of “take it or leave it.” If this is the case, what better way to exercise that final turn of the screw than to make it painfully clear to Greece that it is on the brink of disaster? By rejecting Greek bonds, the ECB flicked the switch to illuminate a display over the euro highway that reads: Beware, road ends ahead. We have been warned.

Nick Malkoutzis

19 responses to “For Greece, ECB = End Close, Beware

  1. Pingback: » Naar de euro-exit? Bruno Tersago

  2. Since you reduced this simple case to acronyms, it might as well stand for ECB = European Cretins Buffoonery.

    Because following the PSI (Possibly Stupidest Idea ever – German inspired idiocy), another class of morons(namely Greek politicians) sought to attach ill-conceived and new fabricated terms to the recapitalization of its banks.

    Therefore the original cretins are now telegraphing their Greek moron counterparts to quit screwing around with the recapitalization saga and restore the health of the Greek banking system ASAP, as it has been agreed upon as of almost six months ago.

    As to the Greek sovereign debt maturing in August it will be funded; no problems whatsoever.

    And to put the whole thing into perspective this is why roughly a month ago Europeans decided that bank recapitalizations as well as other future banking capital needs will be handled directly from Brussels without any political interference whatsover.

    To which of course a well known class of German idiots with their well known tactics of incrementalism, obstructionism and minimalism promptly replied not to expect such relief before 2013.

    Which brings me to my final point. All of Greece’s contemporary problems have the exact same cause: a profound, disturbing and quite frankly disgusting case of German morony.

  3. The ECB has lots of sins to answer for, since there is one underlying problem built into the EU that is driving the less peforming economies into permanent deficits because of the onerous interest rates being imposed. All this because if a clause in the Lisbon treaty that effectively places ALL government financial deals as subordinate to bankers profit margins.

    This post originally appeared on Opera Mundi.

    Greece is emblematic of today’s general crisis of national
    indebtedness. Since 2010, the country has been subjected to nine
    different austerity plans, each one of an extreme severity. The Greek
    people have responded by calling fourteen general strikes. Yet, a
    solution exists.

    The Greek debt crisis is a textbook case and illustrates the utter
    failure of neoliberal policies. Indeed, despite the intervention of
    the European Union, the International Monetary Fund and the European
    Central Bank (ECB), despite the imposition of nine extreme austerity
    plans that include massive increases in taxes, including the VAT,
    price rises, a reduction of salaries (for example, a 32 percent
    cutback of the minimum wage!), retirement benefits and raising the
    legal retirement age, the destruction of essential public services
    such as education and health, the elimination of welfare and the
    privatization of strategic sectors of the economy (ports, airports,
    railways, natural gas, water, gasoline), the population has been
    brought to its knees. Yet, in spite of all of this, the debt is
    greater today than it was before the intervention of the international
    financial institutions in 2010.

    Still, the Greek crisis could have been avoided. Indeed, all that was
    necessary would simply have been for the European Central Bank to
    grant the necessary loans directly to Athens at the same rate of
    interest it charges when lending to private banks, that is to say,
    between 0 percent and 1 percent. This is something that would have
    prevented any speculation on the part of the private banks. However,
    the Lisbon Treaty, drawn up by Valéry Giscard d’Estaing, prohibits
    this possibility for reasons that are difficult to understand if one
    starts with the assumption that the BCE is working in the interest of

    Yet, Article 123 of the Lisbon Treaty states:

    “Overdraft facilities or any other type of credit facility with the
    European Central Bank or with the central banks of Member States
    (hereinafter referred to as ‘national central banks’) in favor of
    Union institutions, bodies, offices or agencies, central governments,
    regional, local or other public authorities, other bodies governed by
    public law, or public undertakings of Member States shall be
    PROHIBITED,as shall the purchase directly from them by the European
    Central Bank or national central banks of debt instruments.”

    In fact, the ECB directly serves the interests of the financial
    market. Thus, private banks borrow from the ECB at rates as low as 0
    percent to 1 percent. They then speculate on this debt by loaning the
    same money to Greece at rates ranging from 6 percent to 18 percent,
    thereby worsening a debt crisis that becomes mathematically unpayable.
    Further, Athens now finds itself in the position of having to borrow
    simply to pay the interest on the debt. Worse still, the ECB sells its
    debt securities back to Greece at a high price, that is to say 100
    percent of their value, even though the ECB had acquired them at 50
    percent. Thus, they speculate on the fate of a nation.

    For these reasons, it is essential that the European Treaty be
    significantly revised in order to allow the ECB to lend directly to
    individual states, thereby avoiding speculative attacks by the
    financial markets on sovereign debt, such as was the case in Greece,
    Ireland, Spain, Portugal and Italy, to name but a few.

    … all this even before the recent revelations about LIBOR as to exactly HOW [and by how MUCH] the bankers have been cooking the books!


    • June, the current rate for Greek sovereign debt via ECB loans is 2%. Over time it will trend towards the 3-4% range.

      As a result Greece has already received the equivalent of a Eurobond.

      As you pointed out, Greece could have received a rate between 0-1% about 2 years ago and the whole problem would have been resolved by now.

      Yet Germany under no circumstances wanted to do this. Instead she wanted to introduce arbitrary terms of austerity to teach other EU members a lesson using Greece as a guinea pig. In Merkel’s own words “Greece had to bleed”. However, in bleeding Greece a la Germania, the amateur Germans broke the limits of the Greek economy and have now created a depression instead of recession. This is all Germany’s doing, a complete and utter failure punctuated by a disturbing ignorance of modern finance (of course the Germans know nothing of finance in general, except labor related issues as they apply to an export economy).

      So there you have it. In bleeding Greece, the ignorant Germans (just like school children who dropped the glass tubes in the science experiment) have made a complete mess and now we are left to clean up their mess.

      And in stead of saying sorry for their awful malpractice; they instead want to pin their failure on Greece. Which is beyond criminal to say the least.

  4. Just to add that in May, when Greek banks were freezed from ECB operations for two weeks, ahead of the disbursement of €18bn to the top-4 banks, ELA funding had jumped from €59bn in April to €124bn in May. At the same time, ECB funding dropped to €3bn in May from €62bn in April. Allocation of Eurosystem funding between ECB and ELA was restored to ‘normal’ levels in June (ECB: €62bn and ELA: €74bn).

    • Mano: Correct.

      As you know the essence of this ebb and flow (or alternation between ECB and ELA) has to do with the recapitalization terms imposed by mostly the leftist part of the coalition government (Venizelos, Kouvelis) on issues such debt forgiveness and the % participation of the private sector.

      The politicos attempted to play this game before and once the ECB froze them out, quickly the Greek banking system received the euro 18 Bil. of the the first trance. Now it’s round 2 of the same game. The ECB wants the Greek state to provide the balance of the total euro 33 Bil. (I think) which the banks were to receive due to the PSI deal. The banks already suffered the effects of the haircut which saw roughly euro 75 Bil. evaporate overnight from the Greek banking and social security insurance sectors back in March. The banks were supposed to have received the equivalent of euro 33 Bil. recap back back then(and not now 4 months later). The excuse of Greece for the delay were procedural matters and the legal identity of the dispensing venue.(BS if you ask me, wrapped into the delay of two successive elections).

      So that’s the essence of this tactical move. The politicos have attempted twice to play with the recap in an effort to make the banks subservient to their political goals. This is the 2nd and final time.

      Therefore, what is going on here is a weird version of a “starve out” game. The ECB wants to starve out the politicos in dispensing with their political interference nonsense. And until they do, ELA would be the only source of funding which BTW is also more expensive. There is a covert/overt message here which is an inducement to finalize the recapitalization pronto. And since the prevailing fashion is to hold up monies, there you have it.

      We have seen this movie countless of times and we are going to see it a few times more. The tactic is the same used by the Troika/Merkel to fund Greece. So this time the ECB is doing it.

  5. According to the Dutch newspaper NRC Handelsblad, 7-8 Countries are disposed to stop further appropriations to Greece. In addition, the Netherlands and Finland will stop funding if the IMF stops. Some observer says that it’s the usually tactic.
    I have no proof of course but I don’t think that this time every government has the support from the parliament.

    Here is the article:

    • Flippa:

      Both the Dutch and the Finns are inconsequential players and clearly under the boot of Germany. Most serious analysts they don’t consider them as independent countries rather as new German provinces in the making.

      Go back to WWII to figure out why. Throw in Sweden, Denmark and Austria and you have at least 5 alternating “go to” players that frequently Germany uses to play its dirty game.

      To even suggest that these 5 countries express independent opinion is more than laughable. Think of these statelettes as receiving orders from Berlin and executing them, posing as independent actors. They are not of course and everybody knows it. They are just a bunch of hypocrites and when Germany lays down the law they just shut up and do as they are told.

      And when it gets too obvious that these 5 are simply mouthpieces for Berlin, we always have some other aspiring East European mediocrities like Slovakia to play the part of the “sincere worrier” of the Hunnic empire.

      • Estevao Veiga

        It seems that you have great difficulty in understanding how democracies work. It may not please you, but when Finland play hardball, it is due to internal politics, and when Greece goes to two elections in less than two months, in the middle of it’s worst economic crises since WW2, it is also for the same reason, internal politics.
        You may try to buy your peace of mind with the kind of reasoning that you expose above, and stay the eternal victim, but I am sorry to tell you that don’t have a single nemesis, it is a coalition, and each one of them behave for the same reason, that is that, between pleasing the Greeks, and not being reelected, and displeasing the Greeks and being reelected, the choice is easy.

      • Estevao:

        Listen to what you are saying. You are saying that Greece has to be massacred for democratic reasons?

        This is like saying the murderer normally doesn’t like to kill, but really in this case had to. Or the rapist saying that the victim asked for it.

      • Estevao Veiga

        Dear Eleni,
        I didn’t said that politicians attend our rational expectations, what successful politicians do is attend to the emotions, prejudices and expectation of their people.
        In the actual crisis, the Greek people is reacting in accordance to a script of being persecuted and overruled that marks their history, and, by consequence, a feeling of helplessness. The consequence is that it is difficult to imagine Greece taking the initiative to solve the crisis, what it does is react to the initiatives of the overlord of the moment, and complain. At this moment, in their mind, their actual overlord are the Germans. The consequence is that anything will be interpreted in order for the story to fit this image, even when we have evidences in contrary. The Finish for example are much more strict than the Germans.
        On the other side, the fear of the Germans are to be taken advantage by the suckers, and, by consequence, all their politics will be oriented on not being taken for a ride. It is also not absurd for them to think this way. Since they made atonement of the Nazism, very often the interaction they had with the other countries means somebody playing their guilt to extract money.
        The result is what you are seeing, where the prejudice of each side reinforce the prejudices of the other side and the total incomprehension that result.
        On my opinion, the one who will profit more in changing is Greece, since the consequences of not changing are tragic. But I don’t believe that it will happen.

      • Estevao:

        Your last comment is indicative of how little you understand Greece. For it is not a victim’s mentality which propels Greek reaction at the moment. Rather it is the avenger’s mentality seeking justice and redress.

        BTW, if I were Germany at this juncture, I would be trembling. Because the waive of global discontent that is about to hit this unfortunate country will make a tsunami look a child’s play.

      • Estevao Veiga

        Dear Dean,
        My chihuahua was in the same mind frame as you when it picked a fight with a german shepherd. Now three weeks had passed and it is still in the veterinary and we don’t know if it will survive…

      • Estevao:

        Sorry about your chihuahua. However, in Greece even our cats can beat German shepherds.

      • And Estevao:

        It’s not confined to German shepherds. Our Greek cats can and will beat up any dog no matter the size.

  6. @Estevao Veiga
    I wish I could share your happy belief in the strong functioning of European democracies.
    In the last greek elections, daily fear-momgering, threats and propaganda from the EU, ECB, Merkel, the Bundesbank et al produced a totally skewed vote from predominately older voters (50+) with the result that the same corrupt politicians were put back in power that brought Greece to this point in the first place. And interestingly enough, they were the preferred politicians of all the above external agents.
    Perhaps things are different in Portugal?

  7. Dean Plassaras,

    Every Government has to take care of the citizens and the opposition member. A poll showed that 69% of German and 65% of French voters said Greece should be released from the eurozone. I know and guess the result is not very different in other countries. In the Netherlands are parties which highly refuse the bailouts and which have influence on the government. So, it’s a pretty difficult situation.


    “Perhaps things are different in Portugal?”

    As far as i know, Portugal is in every economic aspect in an improved situation than Greece. With a little luck you are out of recession next year.

  8. The Greek bank run is expected to end in July according to a report of a very popular Greek financial news portal. About 10 billion has been reinstated according to the news item! If we are going to believe the report, July will be a record month for money returning to Greek banks since about 10 billion has been reinstated!

    • To Jim:
      It is true that deposit inflows reportedly amounted to c€10bn after June 17 elections until the end of July. Nevertheless, withdrawals in the period between the two elections are estimated at €18-20bn, implying that half of these deposits have returned to Greek banks post June 17. Furthermore, the same press source ( notes that there is high interest for time deposits with maturity of 6-12 months, which had suffered the most outflows in the previous period.

      I think that, although expected, it is a positive development, yet we have to wait a little longer to say whether there is a consistent reversal of the previous negative trend.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s