Secret Central Bank Aid Props Up Greek Banks
Published:
Monday, 21 May 2012 | 11:18 PM ET
By: Ralph Atkins in Frankfurt
There
has been no official announcement. No terms or conditions have been
disclosed. But Greece’s banking system is being propped up by an
estimated €100 billion or so of emergency liquidity provided by the
country’s central bank — approved secretly by the European Central Bank
in Frankfurt. If Greece were to leave the eurozone, the immediate cause
might be an ECB decision to pull the plug.
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Scott E. Barbour | Getty Images
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Extensive
use of “emergency liquidity assistance” (ELA) to help banks in the
weakest economies has been one of the less-noticed features of the
eurozone crisis. Separate from normal supplies of liquidity and meant
originally as a temporary facility for national authorities to use when
banks hit problems, ELA proved a lifesaver for the financial system
Ireland and is now even more so in Greece. As such, it has given the ECB
— which has ultimate control over the facility — considerable power to
determine countries’ fates.
Whether
that power would ever be exercised is unclear. ELA is a subject on
which the ECB is deeply reluctant to provide information — even on where
or when it is provided.
“You
don’t say when you are in an emergency situation, because then you make
the situation worse. So I really don’t see the usefulness of being more
transparent,” Luc Coene, Belgium’s central bank governor, explained in a
Financial Times interview this month.
The
ECB’s guard slipped a little late last month. Its weekly financial
statement published on April 24, showed an unexpected €121 billion
increase in the innocently titled heading “other claims on euro area
credit institutions,” the result of putting all ELA under the same item.
By definition, €121 billion was the minimum amount of ELA being
provided by the “eurosystem” — the network of eurozone central banks.
By
scouring ECB and national central bank statements analysts, have since
pieced together more details. Analysts at Barclays, for instance, reckon
Greece is now using €96 billion in ELA, with Ireland accounting for
another €41 billion and Cyprus €4 billion. If correct, total ELA in use
has exceeded €140 billion — more than 10 per cent of the amount lent to
eurozone banks in standard monetary policy operations.
Because
of the risks of extra liquidity creating inflation, ELA in excess of
€500 million requires approval by the ECB’s 23-strong governing council:
its use can be stopped if two-thirds of the council oppose an
application.
Importantly,
the risks fall on the relevant national central bank, rather than being
shared across eurozone central banks as with normal liquidity —
although there would be a general hit if a country left the eurozone.
However there is no theoretical limit to the amount of ELA that can be
provided – and no information, for instance, what collateral recipient
banks have to provide as security or what interest rate they pay.
Ireland’s example shows that the supposedly temporary use of ELA, can
also be prolonged.
Mr
Coene said ELA had to be cut off once banks became insolvent. “It is
emergency liquidity assistance – not solvency assistance,” he said. The
secrecy surrounding ELA creates grey areas, however.
Last
week, the ECB council excluded four Greek banks from ordinary liquidity
operations — forcing them to fall back on ELA. The unofficial reason
was political uncertainty over Greece’s bank recapitalisation plan after
the country’s inconclusive May 6 election.
But
where would the council draw the line? Mario Draghi, ECB president,
would probably seek political cover before Greek ELA was withdrawn.
Although the ECB’s “strong preference” was for Greece to stay in the
eurozone, the country’s future was for politicians to decide, he said
last week.
“Cutting
off ELA would be the way to push Greece out of the eurozone — if that
was wanted, or if Greece really wanted to leave. But I don’t think the
ECB is going to take that decision,” said Laurent Fransolet, Barclays
analyst. “I think the ECB would go to the political powers and have them
take the decision”.
Nevertheless,
ambiguity over how the ECB would really act gives it sway over eurozone
politicians. An ECB threat in late 2010 to pull the plug helped
persuade Ireland to accept an international bailout plan. No doubt, its
governing council will hope to concentrate minds similarly in Athens.
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