ECB stops lending to some Greek banks to limit risk

Thu, May 17, 2012, 01:00

THE EUROPEAN Central Bank said it would temporarily stop lending to some Greek banks to limit its risk as president Mario Draghi signalled the ECB would not compromise on key principles to keep Greece in the euro area.

The ECB said yesterday that it would push the responsibility for lending to some Greek financial institutions on to the Greek central bank until they have sufficiently boosted their capital.

The move comes after Mr Draghi acknowledged for the first time that Greece could leave the monetary union.

While the bank’s strong preference” is that Greece stays in the 17-nation euro area, the ECB would continue to preserve “the integrity of our balance sheet”, he said in a speech in Frankfurt yesterday.

“I think the ECB is playing hardball,” said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

“I doubt they want to get too involved in EU politics, but I think they’re trying to show Greek policy-makers what their banking sector would look like without support from the ECB.”

The move comes as the man who represented private creditors in negotiations leading to the Greek debt restructuring earlier this year said a Greek exit from the euro posed “more ominous potential” to the global economy than the collapse of US bank Lehman Brothers more than three years ago.

The effect of Greece leaving the single currency would be “somewhere between catastrophic and Armageddon”, the managing director of the Institute of International Finance Charles Dallara said.

“The cost to Greece, the cost to Europe, and the cost to the global economy of Greece exiting the euro are all three sufficiently large that they will cause Greek leaders and European leaders to reflect long and hard before taking Greece down this road,” he told The Irish Times.

The European economy could not cope with the strain of such a move and it could also undermine “shaky” global economic recovery.

Mr Dallara represented private creditors in negotiations leading to the restructuring of Greek debt that resulted in more than €100 billion of Greek debt being written off – the biggest writedown of sovereign debt in history.

He warned Ireland against seeking a similar restructuring, saying that Ireland’s debts were “much, much more manageable” than those of Greece.

“It is important to realise that the depth of the debt and economic problems in Greece are beyond any scale of unsustainability than Ireland or any other country in the eurozone faces,” he said.

The ECB said in its statement that the Greek banks now cut off from its lending programmes would regain access to “standard euro-system refinancing” once the recapitalisation process was finalised, “and we expect this to be finalised soon”.

The ECB could only lend to sound banks, and therefore would not allow undercapitalised institutions to access its refinancing operations, a euro area official said on condition of anonymity.

Greek banks locked out of those operations will have to tap the so-called emergency liquidity assistance programme via the Greek central bank, the ECB said.

Greece faces a fresh election on June 17th that may boost parties opposed to the conditions of its international bailouts, raising the prospect of its exit.

European stocks dropped for a third day, to their lowest level this year, amid growing concern Greece will be forced to quit the euro.

The Stoxx Europe 600 Index slipped 0.6 per cent to 244.4 at the close of trading.

The gauge has tumbled 10 per cent from this year’s peak on March 16th amid continued political uncertainty in Greece.

– Additional reporting Bloomberg/Reuters