What’s Going On with Greece and the ECB?

Karl Whelan
Bull Market
Published in
7 min readFeb 2, 2015


It’s complicated ….

One of the key uncertainties surrounding the situation in Greece is the relationship between the Greek banks and the ECB. Lots of press coverage is suggesting the ECB has a set of well-established rules that mean it will not be able to lend to Greek banks in March unless the government negotiates a new EU-IMF program to replace the one expiring at the end of this month. An example is this report which quotes Erkki Liikanen, Governor of the Finnish central bank, saying

“We (ECB) have our own legislation and we will act according to that… Now, Greece’s programme extension will expire in the end of February so some kind of solution must be found, otherwise we can’t continue lending,”

As a general matter, the idea that the ECB is considering pulling funding from the Greek banks seems to be true. But, as is often the case when the world’s press attempts to understand the ECB, the reports get most of the details wrong.

Cutting Greek Banks Off Altogether?

Most of the reports suggest the ECB is about to cut off all funding to the Greek banks. Typical is this report from the FT:

Of more concern to many officials is the Greek banking system, which after massive outflows of deposits is relying on cheap ECB loans to fund day-to-day operations. ECB officials over the weekend made it clear that if the programme expires at the end of February, the central bank would be forced to cut off their liquidity loans.

Is this what’s going on? Well the ECB has almost complete discretion over which banks it lends to. I have written about the ECB’s Risk Control Framework before and it’s been rolled out regularly in the years since I wrote that post. The bottom line is that the ECB can single out specific institutions and decide to not lend to them for pretty much whatever “risk-related” reason they feel like putting forward. Still, this approach, if taken, isn’t based on any hard and fast rules.

Rules Require Cutting Off Greek Government Bonds?

But is that what’s actually going on? Other reports suggest that the key issue is that the ECB is planning to refuse to accept Greek government bonds as collateral for loans. For example, this story from Bloomberg describes the issues as

The danger is that the Greek financial system is left without funding long before Tsipras’s May deadline for a deal.

At the moment, the country has a special dispensation from the ECB because it’s considered to be complying with the bailout program. That means its debt can be used in central bank refinancing operations even though it is rated junk.

“There will be no surprises if we find out that a country is below that rating and there’s no longer a program that that waiver disappears,” ECB Vice President Vitor Constancio said at an event in Cambridge, England, on Saturday.

If Vice President Constancio is referring to cutting off eligibility of specific bonds as collateral, that argues against the ECB’s’s current “official” approach being one of threatening a full cut-off of funds. Still, the idea of “junk-rated bonds are only eligible if a country is in a program” being part of “the ECB’s rules” is an over-statement. In truth, the ECB makes up these rules as it goes along and the “in again, out again” routine with Greek government bond eligibility is a long-standing one at this point.

Does Making Greek Government Bonds Ineligible Matter Much?

An implicit assumption underlying lots of reporting on this topic is that the Greek banks are heavily dependent on using Greek government bonds as collateral for loans from the Eurosystem. But actually this isn’t true.

The Bank of Greece publishes a monthly balance sheet for Greek banks. Click on the liabilities tab: As of December 2014, the Greek banks owed €56 billion to the Eurosystem, via the Bank of Greece. What assets did they use as collateral to secure these loans? Click on the assets tab: The Greek banks only owned €12 billion in Greek government securities at the end of December, so these could only be securing a relatively small amount of the borrowing from the Eurosystem.

Taking a closer look, it becomes clear that Greek government securities are even less important as collateral than these figures make it seem. €7.4 billion of the Greek government securities owned by the banks were Treasury bills, so less than €5 billion were regular Greek government bonds. And other reporting (such as here and here) tells us the ECB has imposed a maximum limit of €3.5 billion on the use of Greek Treasury bills. (Another “rule” that’s basically just more ad hocery).

This means the Greek banks were using at most €8 billion in Greek government debt in December as collateral for loans from the Eurosystem. Set against the total loans of €56 billion owed to the Eurosystem this is fairly small beer. (Factoring in haircuts, its share in collateral would be even less than this comparison suggests).

So, on its own, the eligibility of Greek government bonds is just not that big a deal.

So The Greek Banks Are Cool With The ECB?

Alas, no. The ECB and the Greek banks have some pretty serious issues.

First, there is the already-mentioned restriction on T-bills. But this is already in place and has nothing per se to do with negotiating a new program.

Second, and more important, is that existing ECB rulings are about to cause a big problem. To see what the issue is, check out the table below, taken from Yiannis Mouzakis (who you really should be following if you want to know what’s going in Greece). It shows the ECB-eligible collateral of the four largest Greek bonds. Much of this is in the form of EFSF bonds that the banks received as part of their post-restructuring recapitalisation. Presumably EFSF bonds will still be eligible collateral in March.

But that still leaves €25 billion in “Pillar II and Pillar III” bonds. What are those you might ask? These are bonds issued by banks that were guaranteed by the Greek government and then retained by the issuing banks to use as collateral for loans from the Eurosystem. (This is an old trick from the Irish banking crisis playbook.)

On March 22, 2013, the ECB issued a mundane statement declaring that they weren’t planning to accept bonds of this type after February 28, 2015. The date clearly wasn’t chosen at random. The ECB was putting in place a bargaining chip to influence Greece’s negotiations on a new EU-IMF deal when the existing one ran out. You can search the ECB’s statute hard to figure out how this kind of thing fits with its legal mandates but I’m not sure you’ll find much.

So this is a big issue. But it isn’t anything to do with Greek government bonds or the ECB’s rules (as opposed to its discretionary decisions).

Third, it is clear that the situation with Greece’s banks has worsened since December due to the election campaign, the subsequent outcome of the election and, of course, ECB officials making lots of statements about their plans to withdraw funding. This means the Greek banks are now going to be reliant on Emergency Liquidity Assistance (ELA) i.e. loans from the Bank of Greece that don’t correspond to the normal ECB operations and for which risk is not shared with the rest of the Eurosystem.

I’ve written a lot about ELA over the years (e.g. here) but the key thing you need to know is that ultimately it is up to the ECB Governing Council to decide whether or not to allow these programs. And if the Governing Council feels that Greece signing a new EU-IMF program should be a condition for lending to Greek banks, then they are legally free to do so.

Bottom Line: An Offer Greece Can’t Refuse?

The ECB is pretty clearly playing from its tried and tested playbook in their current stand-off with the Greek government. Governing Council members know they can cut off lots of credit from the Greek banks in March and many of them are happy to tell the world they are thinking about doing this. As a result, they hope to get Greece’s new government to sign a new deal with the EU and IMF.

But don’t believe for a minute that this is a technocratic thing to do with “the ECB having to follow its rules.” And it has almost nothing to do with Greek government bonds being junk-rated. All of the issues discussed above come down to discretionary decisions by the ECB Governing Council (restrictions on T-bills, waivers on junk-rated government bonds, arbitrary lines-in-the-sand on government guaranteed bonds and the mysterious rules of ELA) and there is plenty of wiggle room for them to allow Greek banks to continue receiving various sources of funding next month in the absence of an EU-IMF program agreement.

I fully expect the ECB-as-heavy-hearted-technocrat angle to dominate press coverage of this story this month. That’s a pity because the “ECB in politicised mission creep while helping trigger a bank run” story is more interesting and closer to the truth.



Karl Whelan
Bull Market

Professor of Economics at University College Dublin.