ECB Could Pressure Greece by Refusing to Increase ELA (Update: Small Increase Approved)

As we indicated, we’ve thought the ECB was unlikely to end the ELA as a way to force Greece to capitulate, since it would be too obvious a move to take down the Greek banking system, and would also have the effect of telling depositors in any European debtor state that their money was not safe in a domestic bank. That over time is a way to precipitate bank runs.

But we also pointed out that the board, which rotates at the ECB, had a particularly Greece-unfavorable mix this time. And while more extreme measures, like imposing conditions on the ELA, requires a 2/3 vote, the decision to increase or not increase the size of the facility take a mere majority vote.

So if the bloody-minded board members refuse to honor Greecee’s request to increase the backstop during the board meeting today, it would constitute a serious step to try to force Greece to capitulate. However, most experts believe this would be such a radical step as to be unlikely. And the board mix for each of the two ECB sessions in March is much Greece-friendly.

From ekthimerini:

European Central Bank policymakers debated on Wednesday whether to allow more emergency funding for Greek banks with opinions divided as Athens came under pressure to accept an extended aid-for-reform programme…

The ECB’s policymaking Governing Council was meeting to decide how far the cash-strapped country may support its troubled banks, which are suffering rising deposit outflows due to the political uncertainty.

While the ECB is unlikely to lower the ceiling on emergency lending assistance (ELA) by the Greek central bank, a refusal to increase it would be bad news for the banks, which are close to using up the full 65 billion euros granted so far…

Opposition in EU paymaster Germany will make it difficult for the ECB to cut Athens any financial slack although other countries are in favour of doing so.

Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, opposed any increase in the cap, the sources said.

But while some governors share his reservations, others want more leniency.

One eurozone central bank official forecast a “slight increase” in ELA for Greece, stressing that the ECB “has to try to preserve financial stability” and “its role is not to teach Greece some kind of lesson”….

A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.

There was a lull on Monday but deposit outflows picked up again on Tuesday after talks collapsed, the banker said. ECB officials are keeping tabs on such movements daily, people familiar with the matter said….

One senior official said that ECB President Mario Draghi would turn first to European leaders to guarantee the solvency of Greek banks before considering whether to pull the plug on emergency liquidity.

Were the ECB to cancel all emergency funding, as it threatened to do with Cyprus in 2013, it would force Athens to choose between striking a new deal with its international lenders or facing bankruptcy.

“Pulling the plug on Greece would have potentially catastrophic consequences,” said Ashoka Mody, a former IMF official who helped design Ireland’s bailout.

“The ECB’s threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it.”

Unfortunately for the Greek government, pulling money out of Greek banks is an entirely rational move, but amounts to Greek citizens acting against the government despite their overwhelming support for its aims.

The meeting is expected to run into the evening in Europe, which means we should see a press release shortly.

Update: The ECB increased the ELA, but as modestly as possible. From CNBC:

The European Central Bank has approved a €68 billion ($78 billion), two-week extension on emergency liquidity for Greek banks, Reuters reported, citing a source.

The ECB had already raised the Emergency Liquidity Assistance (ELA) cap to about €65 billion last Thursday. The Greek central bank had requested an extension of about €10 billion, the source told Reuters.

Warren Mosler wrote:

As previously discussed, and relayed to the finance minister in Greece, there is no reason to assume the ECB will cut off liquidity to Greek banks.

First, those banks are private institutions, and regulated and supervised by the ECB, who has deemed them ‘solvent’ and ‘adequately capitalized’ and therefore eligible for liquidity support as members in good standing.

Think of it this way, if NY went rogue, would the Fed cut off Citibank?

The only problem with this comparison is that Citibank is systemically important and none of the Greek banks are. But not supporting the Greek banks would be a dangerous precedent politically and economically.

Recall that the ECB increased the ELA to Greece between meetings by €5 billion, so they could nudge the amount up again if need be.

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  1. Paul Tioxon

    1:53PM– CNBC reports, according to WSJ, ECB will grant the ELA in the amount of 68.3bil Euro, an increase of 3 bil Euro from last week possible extension. This is reported as leaked, not official statement by ECB.

    1. Jim Haygood

      Question is whether €3 billion is enough, with deposit flight at €2 billion a week (and accelerating?).

      Why there’s not a flat-out bank run, with the European policy backdrop in total disarray, is a mystery.

      Or maybe there is, and we’re just not being told.

      Would you leave your deposits at the mercy of annoyed foreign strangers who are threatening dire consequences?

    2. Paul Tioxon

      This is from the website, what I first posted was what I heard on the TV and it was according to Dow Jones, not WSJ, if that is much of a difference?

      “The European Central Bank has approved a roughly €68 billion, two-week extension on emergency liquidity for Greek banks, Dow Jones reported, citing sources.

      Greek Finance Minister Yanis Varoufakis said separately on Wednesday that he believed euro zone finance ministers would approve a Greek proposal to extend the country’s loan agreement later this week, Reuters reported. Euro zone officials will first consider the Greek loan extension request in a working group on Thursday.

      Varoufakis also told reporters that he feels Eurogroup head Jeroen Dijsselbloem will approve of the proposal during a conference call with financial ministers on Friday.”

      1. Jim Haygood

        ‘Dijsselbloem will approve of the proposal’

        One imagines Diesel Boom having a big 1 x 2 meter blank cheque from the ECB printed up and mounted on foamcore, so he can hand it (along with a felt-tipped marker) to Varoufakis as the cameras whir and declare,

        ‘Just fill in any amount you like, Yanis. We love you, man!’

        Europe: where dreams come true.

  2. C

    However, most experts believe this would be such a radical step as to be unlikely. And the board mix for each of the two ECB sessions in March is much Greece-friendly.

    If, however, the current board wants to end this now and is afraid that the later boards would not use this lever perhaps they will be tempted to issue the threat now while it has more teeth.

    While lowering it would be bad for the european banking sector I can’t imagine that they see the current state of affairs, or worse yet an end to Austerity, as being any better. So far the Troika has certainly acted as if preserving Austerity trumps all other concerns.

  3. philippe kieffer

    Defence Minister Panos Kammenos warned on Wednesday Greece will not bow under the pressure placed by the country’s international lenders to sign a bailout deal, saying the government is “ready for anything”.

    Speaking to journalists during an ongoing briefing in Athens, Panos Kammenos said: “If we don’t get what we want we’ll turn it into Kougi. We’ll take it to the end, we won’t back down. If there’s no agreement, we’re ready for anything. The loan agreement is not related to the memorandum and Moscovici’s document could form a base [for an agreement].”

    Kougi, is a reference to a historic event in Greece’s War of Independence against the Ottoman Empire. Following a long siege by the Ottoman Pasha Ali in 1803, the Greek fighters locked inside the city of Souli, in the region of Epirus, northwestern Greece, decided to surrender.

    When Ottoman troops entered the city after the evacuation, a monk named Samuil along with a few fighters who had hid inside a church on the hill of Kougi, blew up the stored gunpowder killing everyone.

  4. Cugel

    I don’t see why they would need to take this step. There’s currently no indication that Greece will receive any significant outside help in its struggle. So, the EU Banksters have to believe that if they just sit back and wait for Greece run out of money, they will have to capitulate sometime in March or April, or else default, in which case they are all convinced they can contain the collapse to just Greece. Expanding or not expanding the Backstop now is not the key issue. Still, the blind stupidity of EU Banksters is apparently limitless, so I could see them taking this measure. But, it would leave very ugly bloody paw prints all over things – especially if they did this even before the end of the month, while there is still the possibility of agreement and the markets are all responding favorably at the moment. It’s rather like in a hostage situation where the police just decide “screw it. Let’s just shoot the hostage in the head and start the firefight and get this over with!” That won’t go over very well with other concerned parties, including the U.S.

    1. Yves Smith Post author

      Agree completely. There is no reason for the ECB to be the heavy. The Eurogroup has already volunteered for that role. But given that, it is odd that the ECB didn’t approve the full amount that Greece requested. This really looks like they are trying to encourage deposit flight while still officially supporting the banking system.

      1. Ben Johannson

        It would be interesting to know what the Greeks are thinking in regard to continuing capital flight, which the banking system can ill-afford. I think they have a logically sound argument for capital controls based on treaty exceptions and previous legal rulings (though how that would hold up in the courts I don’t know.) I suspect the eurogang would interpret it as an escalation, so perhaps for now Tsipras sees the risks as too great.

      2. mpr

        I think this may be overthinking it. Weidmann is reported to have been against any increase, and this is probably just a compromise decision. Also, they probably know exactly how much liquidity the Greek banks need. The GCB probably asked for more as a cushion, and they gave them the minimum necessary.

  5. mpr

    As an aside, doesn’t Mosler think Varoufakis knows the ECB won’t cut off ELA; he’s on record as saying it months ago. That guy certainly thinks highly of himself.

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