Is The ECB Right To Play Hardball With Greece?

Forbes

By Raul Ruparel

3/26/2015 @ 10:06AM

The tensions between Greece and the European Central Bank (ECB) have been palpable for some time – years even. But they have recently become increasingly public and relations have become more strained.

Greek Prime Minister Alexis Tsipras has described the ECB as “asphyxiating” the Greek economy by depriving it of much needed liquidity. Unsurprisingly, this has provoked the ire of the fiercely independent (at least in his mind) ECB President Mario Draghi – reports abound of him shutting Tsipras down at a meeting on the side-lines of last week’s EU summit.

Why have tensioned escalated between the ECB and Greece?

Beyond its usual role in the Troika (which oversees the EU bailout in Greece) and its hard-nosed insistence of stringent economic reforms there are a couple of key decisions which have brought tensions back to the surface.

Putting a ceiling on liquidity to Greek banks – the ECB has strictly limited the amount of liquidity which Greek banks can get through the Emergency Liquidity Assistance (ELA). It has now moved to reviewing the provision on a weekly basis and tends to only increase it by a few hundred million. For example, earlier this week it increased it from €69.8bn to €71bn. While the overall amount remains high, the increases are often below what is requested by the Central Bank of Greece, which believes they do not provide enough cover for the high deposit outflows. Of course, the underlying reason why the ELA must be used is that the ECB will not accept Greek government bonds as collateral – another decision which still irks the Greeks.

Limiting Greek banks purchases/use of short term debt – Under the bailout programme there is a limit on the amount of short term debt (T bills) which Greece can issue – currently €15bn. But there are another couple of limits which the ECB enforces. The first came to a head earlier this week when the ECB legally confirmed that Greek banks can no longer buy any more short term Greek debt. While this would not normally be a huge issue it makes it harder for the Greek state to rollover the €1bn to €2bn of short term debt which is held by foreign investors. There are a number of such rollovers in April and it isn’t yet clear whether Greece will manage to get over these humps. The ECB also has a €3.5bn limit on the amount of short term debt which can be used as collateral for the ELA. The concern here is that allowing the full amount would basically constitute monetary financing as the banks use ECB liquidity to rollover state debt, thereby financing the state.

Who has the stronger case?

Despite what some commentators have suggested it is not clear cut either way. I can appreciate the difficult situation Greece is in but slamming the ECB rarely gets you anywhere. The ECB is also right to note that central banks currently have provided €104bn to Greek banks, not exactly pocket change.

Furthermore, there are two key concerns for the ECB:

Greek banks close to being insolvent – Much of this centres around Greek banks rather than the Greek state directly. But, as I have discussed at length before, Greek banks capital positions are not as strong as they are being made out to be, but are entirely reliant on the state. Given that the current government itself says the state is bankrupt it’s hard to argue with the ECB view that they should be cautious about extending liquidity.

ECB internal tensions – linked to the above, we have heard stories about tensions between the ECB monetary policy side (Draghi) and the Single Supervisory Mechanism. Last week it was reported that Draghi rejected requests from the SSM to limit the amount of short term bills that Greek banks could purchase. This raised some serious questions around the supposed Chinese wall between the two branches and the independence of the SSM. Ultimately, I believe this will have factored into Draghi’s change of heart.

That being said, ultimately the ECB should not play hardball to the point of pushing Greece out of the euro. This is a huge decision which should be made at the highest political level and preferable with some democratic assent. On the flipside of course though, the ECB should not be responsible for permanently keeping Greece in the euro if they are not sticking to their political agreements.

Is the ECB being overly political or not political enough?

Ultimately, the ECB finds itself once again in a tough spot. This time around though, it does have to take some responsibility for where it has ended up. Throughout the crisis the ECB has mixed political actions – sending covert letters trying to influence policy, altering collateral requirements for struggling states – with a rules based approach – limiting ELA based on strict criteria, only buying certain assets. This has made the whole process incredibly confusing. In the end, whatever choice the ECB makes, there will be political implications. It will likely continue to tread the current careful path. In the end then, it makes much more sense for Greece to forget about the ECB and focus more attention on getting reforms implemented and unlocking cash from the Eurozone bailout.

http://www.forbes.com/sites/raoulruparel/2015/03/26/is-the-ecb-right-to-play-hardball-with-greece/