RTRS: ECB STOPS MONETARY POLICY OPERATIONS TO SOME GREEK BANKS AS RECAPITALISATION NOT IN PLACE -CENBANK SOURCE
The Reuters headline above has sparked panic this afternoon. Is the panic warranted?
In some ways, yes. In some ways, no.
The Reuters story states that some Greek banks no longer meet the conditions required to access European Central Bank funds.
This is because Greek banks no longer have enough assets deemed to be of sufficient quality to secure cash from the ECB.
At a time when more and more deposits are leaving the Greek banking system, that hardly helps soothe market jitters.
However, Greek banks can still access euros through the Greek central bank.
How so?
Through something called emergency liquidity assistance, or ELA.
What’s the difference between ELA and accessing ECB cash?
For the banks, the terms of the loans. Under ELA, the Greek central bank, rather than the Eurosystem – which includes the ECB and the other national central banks, can set the collateral requirements. This means that poorer quality assets could be accepted by the Greek central bank in exchange for euros.
For the central banks, the difference is that with ELA, the national central bank is on the hook for any losses. With ECB loans, any losses would be shared.
ELA is usually approved by the ECB’s governing council, made up of the heads of the national central banks and the ECB’s executive board. However, below a certain threshold, ELA does not require approval of the governing council and can be made at the discretion of the national central banks.
Greek banks have already been reliant on ELA for a while now.
So why is so much attention being paid to this now?
It appears that more financing of the Greek banking system is now being done through ELA than before.
However, this rise in usage of ELA may well prove temporary.
Why?
It seems that the reason for the rise in usage is because of the delay in their recapitalisation (Greek banks are due to get European Financial Stability Facility bonds in the coming days — more on which here in this excellent post by FT Alphaville’s Joseph Cotterill).
And the ECB will exchange EFSF bonds for cash through its regular open market operations.
So, once/ if this recapitalisation goes ahead, Greek banks will be able to return to the ECB for cash?
So long as they are then considered by the ECB to be solvent and they have enough assets that the Eurosystem is willing to exchange for cash, then yes.
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