ECB Mulls Tighter Greece Rules After 100 Days of Tspiras

Bloomberg

by Karl Stagno NavarraAlessandro Speciale

11:14 AM EEST

May 6, 2015

European Central Bank officials will debate tighter rules for the liquidity that Greek lenders rely on for survival, two people familiar with the matter said, a move that underscores the fragility of the country’s financial system.

The Governing Council will discuss Wednesday whether to raise discounts on the collateral Greek banks pledge in exchange for emergency funding, said the people, who are familiar with the agenda and asked not to be identified. Governors will also review how much more Emergency Liquidity Assistance to offer Greek banks.

With access to capital markets shut and deposits flowing out of their vaults, Greek banks depend on ELA to stay afloat. While economists say the ECB is unlikely to demand higher haircuts without a green light from Europe’s politicians, the debate shows how concerned some central bankers are about Greece’s solvency 100 days after Prime Minister Alexis Tsipras came to power.

Greek bonds dropped for a second day after Tsipras’s government blamed international creditors for a failure to end an impasse in the country’s bailout talks. The next meeting of European finance ministers is on Monday and a breakdown there could be the trigger for the ECB to tighten collateral rules, said Mujtaba Rahman, an analyst at Eurasia Group.

Monday Milestone

“The important milestone is 11 May,” said Rahman in an e-mail. “The ECB will take its lead from the Eurogroup statement at that point. It is very unlikely that the ECB will preemptively tighten the screws on the Greeks today.”

Greek bonds resumed their slide, with the yield on two-year notes rising 80 basis points to 21.3 percent at 5 p.m. in Athens, after jumping 149 basis points Tuesday. The benchmark stock index rose 2.9 percent after dropping 3.9 percent on Tuesday, the most in six weeks.

Germany’s impression is that the talks are running on “reasonable and constructive” lines, German Finance Ministry spokeswoman Friederike von Tiesenhausen said at a regular press conference in Berlin on Wednesday.

Negotiations between creditors and Greek authorities have made good progress, an EU official said today, adding that there is convergence in areas including pension changes, privatizations and energy reform. The official spoke on condition of anonymity because the talks are private.

Mixed Signals

Greece had clouded the outlook for bailout talks on Tuesday when a government official said no deal would be possible until the European Commission and the International Monetary Fund reduce the number of red lines they’re demanding. The remarks accelerated a selloff in the country’s stocks and bonds.

German Finance Minister Wolfgang Schaeuble said today that while “Greece needs help,” the aid has to “make sense,” adding though “if Greece suffers damage, Germany suffers damage too.”

Greece is also sending mixed signals about just how much money it has left. While officials say the country can continue servicing its debts, one policy maker signaled last month that Greece’s cash-strapped government may struggle beyond the end of May.

An interest payment of about $221 million to the IMF by Greece was made today, the Fund’s spokeswoman Angela Gaviria said in an e-mail.

“The situation is getting pretty close to the endgame,” said Gianluca Ziglio, a fixed-income strategist at Sunrise Brokers LLP in London. “The ECB cannot pull the plug at the moment. But at the same time they are the ones that could, and they would have to if Greek collateral is not eligible any more.”