Cliff Taylor Q&A: Where now in high-stakes game of brinkmanship?
The ECB has flexed its muscles – now Europe is waiting to see how Greece reacts
The ECB, led by Mario Draghi, has moved quicker than expected against Greece’s new Government – are they sending a message or just ploughing their own furrow? Photograph: Martin Leissl/Bloomberg
What exactly did the ECB do? The Greek banks need access to cash from the European Central Bank to keep their operations going. To access this cash, the banks have to give the ECB security over assets they hold. One of the key sources of security used by the Greek banks has been bonds issued by the Greek state. Greek government bonds are rated poorly by the rating agencies, but despite this the ECB has – up to now – said it would accept them nonetheless, because Greece was in an EU/IMF programme.
However the ECB said on Wednesday evening that with no guarantee that the EU/IMF programme will continue, it will no longer accept Greek government bonds as security. The ECB, led by Mario Draghi, has been expected to wait until the end of the month to do this so its move on Wednesday evening surprised the markets.
So do the banks have another way to get money? Yes. But their options are narrowing. The ECB has already said it would close off another source of funding – using bonds issued by the banks themselves and underwritten by the state. This means that Greek banks will have to increase dramatically their reliance on emergency liquidity assistance (ELA) – which means cash coming directly from the Greek central bank, rather than the ECB itself. Greek banks have been given approval to gain access to an additional €10 billion of this emergency funding, it was announced on Thursday morning.
So what’s the big deal if they can still get the money? There are two issues here, one a signal and the other a practicality. The signal is a strong ramping up of pressure from the ECB on Athens to sign up to a new EU/IMF programme. If not there is the threat of cutting the Greek banks off completely. The practicality is directly related to this. ELA from a national central bank has to be renewed every two weeks by the ECB council. So the tap can be turned off very quickly. Remember the infamous “Trichet letter” to Ireland in November 2010, details of which were recently published? The direct threat here was to turn off ELA to Irish banks unless Ireland entered a bailout.
Can the ECB do all this within its rules? The ECB seems to be able to interpret the rules that do exist as it goes along. UCD economist Karl Whelan argues that while there is regular reference to the ECB “enforcing” rules, in reality a lot of its actions are “discretionary” and none more so than in what circumstances it allows ELA to go ahead.
In theory it needs to be fairly certain that the national central bank – which is a part of the ECB system – will get its money back. In practice, who knows exactly where the ECB would choose to “draw the line” in the case of Greece. Its current EU/IMF programme runs out at the end of February. Presumably negotiations, if indeed they get going at all, may run beyond that. But we are into very uncertain territory and an element of brinkmanship on both sides, with the government continuing to insist that it cannot row back on its promise to end the austerity programme.
Are there immediate risks here? Yes. The risk is that the stream of deposits already moving out of Greece’s banks turns into a flood, making their funding situation even more difficult. Depositors will fear a Cyprus-type situation, where in some banks those with larger deposits lost a significant amount of their savings. You could argue about the level of risk depositor’s face, but experience suggests that if they see any risk at all, depositors will move their cash.
Greek bank share prices tanked on Thursday morning, losing between 25 and 30 per cent in value by mid-morning. By lunch time they came back slightly and were down around 7- 8 per cent. If a bank “run” took hold, the Greek authorities could have to restrict access to deposits or impose capital controls, limiting the flow of money out of the state.
What happens next? The shuttle diplomacy continues today with the Greek finance minister meeting his German counterpart. While it had appeared likely that talks between Greece and the rest of Europe might continue on for some weeks, the ECB’s move ups the ante significantly. Is it part of a message to the new government not to overplay its hand? Or is it just the ECB ploughing its own furrow and trying to underline its own concerns – and demonstrate its own power? And how will the new Greek government, led by Syriza, react?
Already there is a flood of commentary online with various theories of how this may now play out. A deal may still be done which keeps everything on the road, for the moment at least, and removes the threat of a messy Greek exit from the euro zone.
But the ECB’s move has raised the stakes significantly.