FAQ: ECB And Greece

Q: What did the European Central Bank do yesterday that caused a sharp drop today in Greek stocks and bonds?

A:  The European Central Bank said that because it was not confident that a new deal could be struck when the Greek assistance program ends at the end of the month, it would no longer accept Greek government bonds, or bonds it guaranteed, as collateral starting February 11. As long as Greece was getting assistance, the ECB was willing to waive its rule against accepting below investment grade collateral.  It ended that waiver. 

Q:  What will the Greek banks do for funding if they cannot borrow from the ECB? 

A:  Greek banks can borrow from the ECB, but they cannot use the government paper as collateral. The currently also use other assets. There is a national recourse. They can borrow from the national central bank.  

Q:  How does that work?

There is a facility called Emergency Lending Assistance (ELA). It is through the national central bank, with permission from the ECB.  The risk stays with the national central bank and is not shared with the Eurosystem. It can accept collateral that the ECB won’t, but at a price.  Borrowing from ECB can cost 5 bp annually.  The cost of ELA funds is 155 bp annually. The other condition is that the lending must be to solvent banks who are suffering a liquidity issue.  The ECB did raise the amount that Greece’ central bank can lend under ELA to 60 bln euros.  In addition to the normal funding needs, Greek banks have experienced an outflow of deposits over the last two months. 

Q:  Could the ECB prevent Greek banks from borrowing at the ELA? 

A: The ECB has used the ELA authorization to force its will on countries previously. It did so against Ireland, for example, in 2010.  It actually denied a couple of Cypriot banks access to the ELA,and this forced a restructuring upon them. Under some scenarios, the failure of the newly elected Greek government to reach a deal with its official creditors by the end of February could spur the ECB into deciding that Greek banks were suffering from a solvency issue and not a liquidity problem. They could then decide (2/3 vote required) to deny the Greek central bank ELA authority. This would trigger a deeper crisis and could be the push of Greece out of the eurozone.