Mario Draghi has been thrust into the political spotlight again. The European Central Bank president is set to play a vital role in deciding the fate of Greece’s banks and ultimately the country’s membership of the single currency.
The ECB has the power to severely limit Greek banks’ access to its liquidity operations on March 1, when the Syriza-led government has said it will exit any formal EU bailout programme. Syriza, which says it will continue to talk to its main creditors, such as the ECB, wants a new contract with the eurozone in place by the end of May.
Turning off the liquidity tap has the potential to push Greece out of the eurozone by sparking a run on the country’s banks, or it could force officials in Athens to resort to capital controls to stop depositors pulling their cash out. Despite these risks, the ECB has signalled it will stand firm against what it views as the Greek government’s threat to quit its programme.
“This is a game of chicken. The ECB is clearly applying pressure on Greece,” said Philippe Legrain, a visiting senior fellow at the London School of Economics’ European Institute.
The central bank’s bargaining chip is its collateral framework, a list of the assets that lenders can use to access the cheap central bank cash that is the foundation of the currency bloc’s financial system.
The ECB has tinkered with this list constantly. Yet policy makers maintain they will keep to a ban on accepting government bonds with junk ratings, such as Greece’s, if countries exit a bailout programme. That, and another proposed change which comes into force on March 1 that limits the use of some government-guaranteed bank debt, would leave Greek lenders short of assets to exchange for cash through the ECB’s regular operations.
Struggling to access these operations, Greek lenders could still secure more expensive emergency loans from the Bank of Greece through what the ECB terms “emergency liquidity assistance”.
The national central bank has complete discretion over ELA, with the only condition that lenders are solvent. The short-term bills that Syriza plans to issue to fund the government between February and May could, for instance, qualify as eligible collateral at the Bank of Greece’s discretion.
The nuclear option would be for the ECB to ban ELA funding by two-thirds of the governing council declaring the country’s banks insolvent.
That would undermine the results of the ECB’s recent health check of the eurozone’s financial system, which gave three of the country’s four largest lenders the all-clear. The fourth, Piraeus Bank, has already made up the small capital shortfall it had at the end of 2013. Greece has, however, seen large-scale withdrawals since the assessment was completed.
The governing council discusses ELA funding each time it meets, about once a fortnight. The next meeting is on Wednesday.
Karl Whelan, an economics professor at University College Dublin, said: “The ECB is working on the assumption that no Greek government will want to get to March 1 and not have liquidity in place for its banks . . . Whether Syriza sees it like that is not at all clear.”
If Syriza sticks to its guns, will the ECB blink? The case of Cyprus in 2013, where Jörg Asmussen, then an ECB board member, strong-armed the country into taking an EU deal by threatening to cut the island’s banks off from ELA, suggests not.
Cyprus’s crisis also set a precedent for capital controls. But imposing controls in Greece could trigger a broader panic.
“What happened in Cyprus happened in Cyprus. And life went on,” said Mr Whelan “There is a risk is that if controls are introduced in Greece too, then depositors in places like Portugal begin to panic and think this is just something that eurozone officials do.”
Mr Draghi has kept his position on Greece quiet. He is no stranger to using a central bank’s monetary prowess for political means, co-signing a letter written by Jean-Claude Trichet, his predecessor, to Silvio Berlusconi in 2011. That missive, written during his stint as Bank of Italy president, called on the former Italian prime minister to pass a credible plan for economic reforms at a time when the ECB was buying government debt through its Securities Markets Programme.
At the same time, he has in the past left it to elected officials to take decisions that would, in effect, throw countries out of the currency area. In 2012, when Greece threatened to rip up the terms of its bailout programme, the ECB president called on the eurogroup of eurozone finance ministers to guarantee the eligibility of Greek bonds as collateral.
“I’d be very surprised if Mr Draghi wanted to put himself on the front line,” Mr Legrain said. “I very much doubt that an unelected central banker wants to be the person who risks blowing up their own currency. What’s in it for him in being the fall guy?”
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