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17th Aug 2022

ECB tightens noose on Greek banks

  • ECB warned cash will 'only be provided against sufficient collateral' (Photo: Valentina Pop)

The European Central Bank (ECB) tightened the noose on Greece’s banks on Monday (6 July), refusing to increase liquidity assistance.

In a widely anticipated move, the ECB’s governing council rejected a request by the Greek government to increase emergency liquidity assistance (ELA) to its banking sector by a further €3 billion, leaving it frozen at €89 billion.

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It also increased its requirements for the assets which Greek banks must present in order to access the cash.

Precise details on the ECB’s collateral requirements remain shrouded in secrecy, but increasing its discounts - known as “haircuts” - means banks must post higher-value collateral.

The earlier decision by the ECB to freeze its ELA ceiling - which came one day after Greek PM Alexis Tsipras announced the referendum -intensified the country’s cash-flow crisis.

Since then, Greece’s banks have not reopened for business and a €60 per day limit on cash withdrawals remains in place.

“Until Wednesday evening we continue as things stand today”, Louka Katseli, chairwoman of the National Bank of Greece, said on Monday.

The cash squeeze, combined with the dwindling amount of assets available to Greece’s banks, has prompted a number of market analysts to forecast the government will have to impose a levy on savers’ deposits.

Cyprus is so far the only eurozone country to have imposed such a levy - on savings above €100,000 - as part of its 2013 bailout programme.

In a statement, the ECB said that “the financial situation of the Hellenic Republic has an impact on Greek banks since the collateral they use in ELA relies to a significant extent on government-linked assets”.

It added that funds would “only be provided against sufficient collateral”.

A note by Barclays bank published on Monday estimates the ECB is currently imposing an average haircut of 48 percent on Greek banks, who, it adds, hold ELA-eligible collateral of about €28 billion.

“Our sensitivity analysis of the impact of any increase in the haircuts to the spare eligible collateral shows that an increase in haircuts to about 60 percent would result in the reduction of the total spare eligible collateral to almost zero”, the British lender adds.

In February, the ECB increased Greek banks’ reliance on ELA by preventing them from posting the government’s junk-rated bonds as collateral.

The decision came after Tsipras halted implementation of reforms required under its EU bailout programme.

According to the ECB’s rules, the ELA programme is available to banks which face a cash-flow crisis but which aren’t per se insolvent.

The Greek government faces its next big repayment on 20 July, when it must redeem €3.5 billion of ECB bonds.

Failure to meet this payment would almost certainly result in the ECB halting its ELA programme.

Anxious to avoid accusations that it’s behaving politically, the ECB is unlikely to pull the plug on the Greek ELA programme until all hope of a new bailout deal is extinguished.

The ECB’s balance sheet is currently exposed to an estimated €127 billion in Greece.

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