The ECB is in full sack-of-Carthage mode if it fails to increase the ELA today to give Greek banks some hope of survival and more important for the economy, of providing payment services to citizens, businesses (particularly importers) and tourists. From Bloomberg:
Current opinion in the Governing Council is for the cap on Emergency Liquidity Assistance to stay at the current 88.6 billion euros ($96.8 billion), the people said, asking not to be named as the meeting is private. The ECB’s Executive Board recommended that the limit stay in place for now, one person said. The Greek central bank asked for an increase of 1.5 billion euros, the people said. Spokesmen for the ECB and the Bank of Greece declined to comment.
If this comes to pass (the ECB is to make its decision later today), the refusal is utterly insane and horrifically destructive. Even if Greece were to get an ELA increase, it would take time for banks to begin restoring services. The economy will continue to decay at an ever-accelerating rate and the damage will become more and more permanent as businesses fail, which means workers will lose jobs and income.
The apparent rationale is that the ECB is not willing to take any more credit risk and wants its July 20 bond payment in hand first:
While Greek lawmakers have now passed reform measures demanded by creditors in return for negotiating a third bailout package, that may not yet be enough for the ECB to change its stance. With European-led funding still not signed off, Greece’s ability to repay a 3.5 billion-euro bond to the central bank on July 20 isn’t guaranteed.
Sadly, this is consistent with prior ECB statements that it wanted a guarantee from the Eurozone countries before it would extend more credit to Greece (it apparently regards any remaining collateral at Greek banks as too rancid to use as a basis for more loans).
There was a troubling forewarning of this hard stance via a July 9 speech by the powerful Bundesbank chairman, Jens Weidmann (hat tip Nathan Tankus):
Greece is a topic that shows us in no uncertain terms that, despite the deeper integration that the crisis brought about in Europe, the euro-area member states are ultimately still responsible for their own affairs. They can decide for themselves not to service their debts, to collect taxes inadequately, and – this is something I particularly fear in the case of Greece – to lead their country’s economy into deep trouble.
The Greek government has not only walked out on the previous agreements, but has been widely criticised as an unreliable negotiating partner. A little over a week ago, the assistance programme finally came to an end, and the Greek government has stopped honouring its payment obligations towards public creditors such as the IMF.
In addition, a clear majority of the Greek general public have spoken out in a referendum against contributing any further to the solvency of their country through additional consolidation measures and reforms.
What is the role of central banks in this situation?
Central banks – although they have the means – have no mandate, in my view, to safeguard the solvency of banks and governments. That kind of implicit redistribution is a matter for governments or parliaments, if at all.
Despite the practical difficulties involved in telling illiquidity from insolvency in real time, central banks need to show where their limits lie. Besides, in Greece doubts about the solvency of banks are legitimate and rising by the day. It needs to be crystal clear that responsibility for further developments in Greece and for any decisions on transferring financial resources lies with the Greek government and the countries providing assistance – not the ECB Governing Council.
This is the madness the Eurozone has produced. National governments are held responsible for the performance of their economies when they do not control interest rates (and therefore are subject to overheating or unduly low growth via “one rate for all” not necessarily fitting them) and have tight deficit limits, which means they do much in the way of fiscal stimulus. And Greece is in deflation. Its widely-touted spot of growth in 2014 was the result of prices falling even faster than the rate of contraction in nominal GDP! That’s not a sign of improvement, that’s a disaster in progress.
One can only hope that Bloomberg is right that the ECB will stop the asphyxiation of banks and the economy on Monday if the ECB gets its payment from Greece then. But even if it proves to be only another days of continued abuse via withholding liquidity, that’s an eternity for desperate business owners and workers, and for the customers that need their wares (particularly food and drug importers). ECB inaction would be yet another indicator that the Eurocrats will do whatever level of amputation is needed to fit Greece to the Procrustean bed of their rules.
Update: Due to having to fight some fires, I’ve been off the grid almost entirely and hence am super late to update this post. Apologies.
The Bloomberg intelligence proved to be faulty and the ECB did give Greek banks a teeny bit of relief. One has to assume that the central bank decided it needed not put itself in the political spotlight by continuing to choke Greek banks and the economy. But while the amount of liquidity to be provided may forestall bad press, it’s hardly enough to represent more than a small meal to a starving person. From the Financial Times:
Mario Draghi, head of the European Central Bank, affirmed his faith in Greece remaining in the euro as the central bank raised its limit on emergency loans to Greek banks by €900m over one week…
The ECB move prompted Athens to signal that its banks, which have been shut for two weeks, would reopen on Monday. The Hellenic Banks Association said an official announcement would be issued at the weekend with lenders offering “all services which do not give rise to capital flight”. Capital controls will remain in place
Recall that during the worst of the bank run, deposit withdrawals exceeded €1 billion a day. With conditions still fragile, jittery depositors won’t be allowed to withdraw much if any more than they have been, a mere €60 euros a day. As Michael Shedlock points out:
Banks to Open, With a Catch
Greek banks purportedly will open on Monday after having been shut for about two weeks.
Is there a catch? You bet.
Banks will be open for “all services which do not give rise to capital flight” and capital controls will remain in place.”
Want to make a deposit? Sure, that will be allowed. Want your money back? Well, you are going to have a problem getting it.
How big a problem? We find out Monday.
To give appearance to the idea that things are improving, I suspect customers will find they can take out another €10 euros or so, per day, perhaps €70 euros, up from the current €60.
If my guess is correct (and you are foolish enough to have €25,550 in the bank), it will take you a year to get your money, even if you religiously take out the maximum every day.
Of course, that assumes everyone else does not do the same. If they do, the ECB will put a halt to it