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Categorized | Banks, Economy

ECB set to raise the heat on Greek banks

Posted on June 30, 2015

epa04820968 People wait in a queue to withdraw money from an ATM outside a branch of Greece's Alpha Bank in Athens, Greece, 27 June 2015. Greek Prime Minister Alexis Tsipras called for a referendum on the Greek debt deal on 05 July, during a televised speech late night on 27 June on Greek state TV. EPA/ALEXANDROS VLACHOS©EPA

People queue to withdraw money from an ATM outside a branch of Greece’s Alpha Bank in Athens on Saturday

When the eurozone’s central bankers meet in Frankfurt on Wednesday, they could make a decision which some officials fear could push one or more of Greece’s largest banks over the edge.

The European Central Bank’s governing council is poised to impose tougher haircuts on the collateral Greek lenders place in exchange for the emergency loans. If the haircuts are tough enough, it could leave banks struggling to access vital funding.

    The ECB on Sunday imposed an €89bn ceiling for so-called emergency liquidity assistance, effectively putting the Greek banking system into hibernation. If, to reflect the increased risk of default, the ECB now applied bigger discounts to the Greek government bonds and government-backed assets which lenders use as collateral, that could leave banks struggling to roll over those emergency overnight loans.

    Doubts abound in Frankfurt and Brussels about whether all of Greece’s four biggest banks can survive the week. Even with bank branches closed until next Tuesday and ATM withdrawals limited to €60, officials fear some of the country’s lenders are so weak that they will struggle to honour their customers until Sunday’s referendum, when Greeks will decide whether to accept the terms offered by international creditors.

    The Syriza-led government’s confirmation that it will not pay the €1.5bn it owes to the International Monetary Fund on Tuesday and the expectation that Athens will fall out of its bailout programme at midnight has put the ECB in a delicate position.

    The ECB’s senior officials have now openly acknowledged the possibility of a Greek exit from the currency union. Benoît Cœuré, a member of the ECB’s executive board, told French newspaper Les Echos in an interview published on Tuesday: “A Greek exit from the eurozone, so far a theoretical issue, can unfortunately not be excluded any more.”

    The ECB is the guardian of the eurozone’s financial stability and is ultimately responsible for the supervision of Greece’s four largest banks.

    But some on its policy-making governing council feel that Athens’ exit from a programme — notwithstanding its 11th-hour request for an extension and third bailout — leaves the ECB with little choice but to take actions that would, in effect, cut the Bank of Greece’s emergency support to Greek lenders.

    Some eurozone officials fear that the position at Greece’s biggest lenders is so tight the ECB could be in danger of pushing some weaker banks over the edge if tougher haircuts are imposed.

    There is also concern a move would effectively harden the ECB’s existing ELA cap of €89bn by leaving Greek banks with little collateral left to use for emergency loans. “This is a dangerous game unless you have perfect information, and it is far from perfect,” said one official following the situation.

    To avoid a situation where the haircuts are so severe that banks are pushed into bankruptcy, the ECB could invoke a so-called “proportionality principle”, where European Institutions must take into account the ultimate outcomes of any policy decision they make. In this case, that would imply that the ECB would be unable under EU law to impose haircuts which could lead the Greek banking sector to collapse. Instead, the haircuts could be much smaller than market prices imply.

    In depth

    Greece debt crisis

    Greece debt crisis

    The Syriza government is facing resistance to its plans to tackle the country’s massive debt burden

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    “If you raise haircuts to reflect that Greece is a country in default, then you will push Greek banks over the edge,” said Huw Pill, economist at Goldman Sachs and a former central bank official. “But the ECB will be reluctant to take that step. In practice, the ECB has been quite pragmatic in the past. And where there’s a will, there’s a way.”

    While there was broad support on the governing council for imposing the €89bn ceiling on ELA, there are splits on what to do next.

    One camp, which includes the heads of the German and Dutch central banks, wants the ECB to pull ELA altogether straight away.

    The ECB refused to grant ELA to Cypriot banks without an EU and International Monetary Fund programme in 2013, but the council could justify a decision to continue to provide emergency loans in the case of Greece because of the possibility of a ‘Yes’ vote in Sunday’s referendum.


    Greece defaults on its IMF debt

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    Greece has become be the first developed country to go into “arrears” with the IMF. Martin Arnold, FT banking editor, discusses what the default means for the global banking system with Ferdinando Giugliano, Emma Dunkley and Laura Noonan.

    Pulling ELA completely would lead to the collapse of Greece’s banking system and the ECB’s hawks will almost certainly not get their way before this weekend’s vote, when a win for the ‘No’ camp would pile pressure on ECB to use such a nuclear option.

    Since January banks have endured the most rapid deposit run in Greek history, a €30bn outflow that has left the sector reliant on ELA.

    Relatively stronger banks in Greece — including the National Bank of Greece — are supporting the sector through some interbank loans, according to people familiar with the situation. Greek officials are also considering whether to further restrict bank withdrawals and transactions.

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