The ECB Plays Hardball – Sort Of

Adios, Toxic Trash Debt from the Hellenic Province

The ECB continues to play the role of “bad cop” in the current back and forth between the Syriza-led government of Greece and the EU. The latest salvo entailed the ECB suddenly rescinding the waiver that made junk-rated Greek debt eligible for refinancing operations with the central bank. Here is the wording of its statement:

Eligibility of Greek bonds used as collateral in euro system monetary policy operations

The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic.The waiver allowed these instruments to be used in euro system monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing euro system rules.

This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of euro system counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing euro system rules.

The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).

(emphasis added)

This means that by February 11, the ECB will have removed all junk-rated Greek debt from its balance sheet. However, for the moment this will make no difference to the Greek banking system in practice, as the Bank of Greece can still extend “ELA”, i.e., emergency liquidity assistance. So this is essentially just a warning shot.

Photo credit: Jonas de Ruytter

The ELA Conundrum