The Corner

Draghi’s Teeth

The European Central Bank tightens the screws on Greece.

Reuters:

The European Central Bank abruptly canceled its acceptance of Greek bonds in return for funding on Wednesday, shifting the burden onto Athens’ central bank to finance its lenders and isolating Greece unless it strikes a new reform deal.

What does this mean?

Bloomberg:

Since 2010 [Greek banks] had been able to access funds from the ECB against junk-rated collateral [including Greek sovereign debt], must now apply for funding from their national central bank at higher rates…. Greek government debt currently pledged as collateral under ECB refinancing operations will no longer be eligible as of Feb. 11 when the current operation matures, the ECB said.

In other words Greek banks can get still get funding, but they have to go through the Greek Central Bank to do so, through a program known as Emergency Liquidity Assistance (more on that here).

Bloomberg:

ELA is priced at an annual interest rate of 1.55 percent compared with the current ECB refinancing rate of 0.05 percent… The ECB also has the power to refuse permission for the Greek central bank to supply funds under ELA, and reviews the procedure every two weeks.

Reuters (my emphasis added):

[T]he ECB move, which required the support of a majority of central bank chiefs across the euro zone, shows widespread dismay with the new Greek government’s plans not only in Frankfurt but across the 19-country bloc.

Replying to those already grumbling that the ECB is playing politics, Open Europe’s Mats Persson tweets this:

Sudden outrage at ECB ‘playing politics’, as if junk debt waivers, Cyprus stand-off, Berlusconi/Zapatero letters, SMP etc weren’t political

Quite.

So what now?  Well, I continue to think that a deal will eventually be cut. This was never going to be an easy negotiation, and it was bound to involve tough tactics on both sides. The wild card for now continues to be the banks. If money keeps pouring out of the Greek banks, will we see ‘temporary’ capital controls on the Cypriot model (in other words a de facto, if not de jure, Grexit, at least for a while), and will Greek bank depositors want to hang around to find out? I wouldn’t.

Reuters:

Two Greek banks had already begun to tap emergency liquidity assistance from the Bank of Greece after an outflow of deposits accelerated after the victory of the hard left Syriza party in a general election on Jan. 25, banking sources had told Reuters.

Watch the banks

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