So What Did ECB Just Do To Greece?
Relax, it’s no big deal. Just some muscles being flexed.
The ECB just issued an important-looking statement on Greece, cutting off all debt issued or guaranteed by the Greek government from its list of eligible collateral. My first suggestion on this is to follow this man’s advice.
Anyone who wants to understand the nitty-gritty details of what just happened with the ECB and Greece should probably read my post from Sunday night.
On the big picture, I stressed that ultimately the ECB’s decisions on what kind of assets could be used as collateral for normal Eurosystem loans were highly discretionary. I also suggested that decisions on whether to allow ELA were even more discretionary with basically no standardized set of conditions. Based on this, I emphasised that those who saw the potential March 1 cutoff of ECB funds from the Greek banks as something to do with hard-and-fast ECB rules were well off the mark.
I think tonight’s statement confirms this point. The decision to make various types of collateral ineligible was taken on the following basis:
Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review
So the Governing Council have decided they can’t now “assume a successful conclusion of the programme review.” Who knows what they were assuming before? But it should be very clear now that this isn’t about hard-and-fast rules. The Governing Council has explicitly made this decision based on their feelings and hunches about how negotiations are going.
At least, unlike in its previous “Fight Club” days, the ECB now admits that ELA is available and will step in to take the place of the regular Eurosystem lending that has been revoked. So there are no immediate implications for liquidity provision to the Greek banks. The ECB is flexing its muscles, letting everyone know that are very close to pulling liquidity from Greece but no funds have been withdrawn yet.
On the positive side, this decision simplifies matters to their essence. As in Ireland and Cypus previously, whether the Greek banks can keep operating depends on the ECB’s discretionary decision on whether to keep approving ELA. And, as with those previous cases, the ECB has decided what it wants in return for ELA and is determined to get its way.
This decision saves us weeks of more under-informed articles about “rules” and “waivers” and will help people understand what’s going on: The ECB will pull funding from Greece’s banks until, well, until they get whatever it is they want—most likely a sufficiently strong indication that substantive negotiations likely to succeed are underway. My current working assumption is that Syriza will meet that condition in the coming weeks and the banks will continue to receive ELA.
At the same time, this is risky business. Yiannis Mouzakis may understand that it’s no big deal and everyone should chill out but a quick examination of the Internet will reveal that a lot of people have been spooked by this announcement. (At the risk of harping on about the same point, some people seem to have been spooked by the pure arbitrariness of it all, having previously believed the ECB was following some kind of rule book.) Deposit withdrawals are likely to accelerate as a result of this announcement and talk of capital controls will also escalate.
I’m fairly optimistic Greece and the EU can get this thing sorted in the coming weeks. Given this, I think the ECB Governing Council has today increased the financial stability threat to the Eurozone without achieving anything positive in return.