Greece Faces Pending Deadline as ECB Eyes Haircut Option

by Karl Stagno Navarra,

Alessandro Speciale Greece needs to show it’s serious about reaching an agreement with international creditors next week or risk tighter liquidity rules being imposed on its banks.

European Central Bank officials want progress at a meeting of euro-region finance ministers on May 11 or they will consider tightening Greek banks’ access to emergency liquidity they need to stay afloat, said two officials who spoke on condition of anonymity as the talks are private. One policy maker said they’re prepared to raise haircuts -- the discounts imposed on collateral pledged by Greek banks in return for funding -- to levels seen last year. An ECB spokesman declined to comment.

The move reflects growing frustration among top decision makers with the game of brinkmanship shown by Greek Prime Minister Alexis Tsipras’s government since it came to power 101 days ago. As talks drag on, Greek bank deposits are shriveling and ECB liquidity has become the country’s chief lifeline.

“Rarely have I seen Europe so united, except for one country, on the need to follow the rules,” ECB Executive Board Member Yves Mersch said in interview published on the ECB’s website. “Those countries wouldn’t like everything achieved in the past -- the effort made -- frustrated now that it is starting to bear fruit.”

Improved Mood

Euro-area central bankers are concerned about Greece’s solvency as debt repayments loom, and one official said next week’s decision will hinge on Greece making a transfer to theInternational Monetary Fund of about 743 million-euro ($843 million). At the same time, they’re reluctant to act before politicians have a chance to salvage the bailout program.

The mood over the talks has improved since Greek finance minister Yanis Varoufakis was sidelined by a new negotiating team under Deputy Foreign Minister Euclid Tsakalotos.

Tsipras spoke directly with European Commission President Jean-Claude Juncker Wednesday to discuss “progress made in the talks between Greece and its partners over the last days,” the EU said in a statement, adding that they talked about topics including pension reforms, competitiveness and job creation.

The Athens Stock Exchange Index gained 2.4 percent to 836.26 as of 11:54 a.m. in Athens. Greek bonds also advanced, with the yield on the 10-year Greek government bond dropping 33 basis points to 10.9 percent.

Limit Raised

Most members of the ECB’s Governing Council, led by President Mario Draghi, argued Wednesday that it would be unfair to restrict access to liquidity before the outcome is clear from Monday’s meeting of euro-area finance ministers, one of the people said. For now, governors are content to keep Greek banks’ liquidity for as long as they are solvent and have adequate collateral, according to a so-called “terms of reference” unofficial document read to Bloomberg News.

With deposit withdrawals continuing at Greek banks, ECB officials raised the cap on Emergency Liquidity Assistance by 2 billion euros to 78.9 billion euros, the people said. The cash is provided by the Greek central bank against lower collateral standards than the ECB typically accepts.

The central bank decided last October to reduce the risk premium charged on Greek securities, citing “overall improved market conditions” for the assets at the time. Since then, the government has changed and the incoming administration has stalled on the reforms needed to access its bailout funds.

Early this year, the ECB suspended a waiver on collateral requirements for Greek debt, forcing banks to rely more on liquidity assistance from their own central bank. Increasing the haircuts now would force lenders to post higher collateral in exchange for funding.

Even so, more draconian ideas have been floated. An internal ECB proposal circulated in April contained an option that would see haircuts raised to as high as 90 percent, a level consistent with Greece being in default.Nikos Chrysoloras

8:40 PM EEST

May 6, 2015