There has been no official
announcement. No terms or conditions have been disclosed. But Greece’s banking
system is being propped up by an estimated €100 billion or so of emergency
liquidity provided by the country’s central bank — approved secretly by the
European Central Bank in Frankfurt. If Greece were to leave the eurozone, the
immediate cause might be an ECB decision to pull the plug.
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Scott E. Barbour
| Getty Images
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Extensive use of “emergency
liquidity assistance” (ELA) to help banks in the weakest economies has been one
of the less-noticed features of the eurozone crisis. Separate from normal
supplies of liquidity and meant originally as a temporary facility for national
authorities to use when banks hit problems, ELA proved a lifesaver for the
financial system Ireland and is now even more so in Greece. As such, it has
given the ECB — which has ultimate control over the facility — considerable
power to determine countries’ fates.
Whether that power would ever be
exercised is unclear. ELA is a subject on which the ECB is deeply reluctant to
provide information — even on where or when it is provided.
“You don’t say when you are in an
emergency situation, because then you make the situation worse. So I really
don’t see the usefulness of being more transparent,” Luc Coene, Belgium’s
central bank governor, explained in a Financial Times interview this month.
The ECB’s guard slipped a little
late last month. Its weekly financial statement published on April 24, showed an
unexpected €121 billion increase in the innocently titled heading “other claims
on euro area credit institutions,” the result of putting all ELA under the same
item. By definition, €121 billion was the minimum amount of ELA being provided
by the “eurosystem” — the network of eurozone central banks.
By scouring ECB and national
central bank statements analysts, have since pieced together more details.
Analysts at Barclays, for instance, reckon Greece is now using €96 billion in
ELA, with Ireland accounting for another €41 billion and Cyprus €4 billion. If
correct, total ELA in use has exceeded €140 billion — more than 10 per cent of
the amount lent to eurozone banks in standard monetary policy operations.
Because of the risks of extra
liquidity creating inflation, ELA in excess of €500 million requires approval by
the ECB’s 23-strong governing council: its use can be stopped if two-thirds of
the council oppose an application.
Importantly, the risks fall on the
relevant national central bank, rather than being shared across eurozone central
banks as with normal liquidity — although there would be a general hit if a
country left the eurozone. However there is no theoretical limit to the amount
of ELA that can be provided – and no information, for instance, what collateral
recipient banks have to provide as security or what interest rate they pay.
Ireland’s example shows that the supposedly temporary use of ELA, can also be
prolonged.
Mr Coene said ELA had to be cut
off once banks became insolvent. “It is emergency liquidity assistance – not
solvency assistance,” he said. The secrecy surrounding ELA creates grey areas,
however.
Last week, the ECB council
excluded four Greek banks from ordinary liquidity operations — forcing them to
fall back on ELA. The unofficial reason was political uncertainty over Greece’s
bank recapitalisation plan after the country’s inconclusive May 6 election.
But where would the council draw
the line? Mario Draghi, ECB president, would probably seek political cover
before Greek ELA was withdrawn. Although the ECB’s “strong preference” was for
Greece to stay in the eurozone, the country’s future was for politicians to
decide, he said last week.
“Cutting off ELA would be the way
to push Greece out of the eurozone — if that was wanted, or if Greece really
wanted to leave. But I don’t think the ECB is going to take that decision,” said
Laurent Fransolet, Barclays analyst. “I think the ECB would go to the political
powers and have them take the decision”.
Nevertheless, ambiguity over how
the ECB would really act gives it sway over eurozone politicians. An ECB threat
in late 2010 to pull the plug helped persuade Ireland to accept an international
bailout plan. No doubt, its governing council will hope to concentrate minds
similarly in Athens.
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