Time Keeps On Ticking

The US dollar is enjoying broad gains today. It is extending its recent gains after a consolidative session yesterday as investors tried digesting the weekend developments. The yen is the sole exception among the majors. It is managing to hold its own against the dollar.  

The euro has been pushed back to the $1.0950 area seen in response to the Greek referendum call in the first place. A  report in the Greek paper eKathimerini claims that 16 of 18 eurozone members are willing to let Greece exit the monetary union. While it sounds ominous, it needs not be. The point is that Greece does not want to leave the monetary union. It will have to be pushed out.  Letting an unwilling party leave is one thing, ejecting it, is another.  

Some observers argue that sure Greece wants to stay in but does not want to meet the conditions of membership. This too sounds smart, but the precise conditions are not readily apparent. Like a football game, the violation of the rules has been incorporated into the game itself. Germany and France were among the first to violate the Stability and Growth Pact. They voted against being fined. France and Italy have repeatedly not delivered budgets in line with agreements with the EC. The violation of rules by themselves cannot therefore be grounds for dismissal.  

The ECB left the ELA cap unchanged while adjusting the collateral haircut. The details on the haircut are not known, but it is understood that that increase in the haircuts. Remember that a range of assets is used for collateral and not all collateral is given the same haircut. The principle involved is that Greek banks use government-linked securities extensively for collateral.  This government link is becoming more toxic. 

The risks associated with ELA lending ar shouldered by the national central bank. It is not a function of the ECB’s monetary policy, for which it was recently granted wide berth by the European Court of Justice.  It is not clear the extent of the ECB’s authority in ELA. However, the ECB’s claim seems to be that what it can enforce is the ban on central bank financing of the government. ELA funds going banks must not be used to fund the Greek government, and that line get blurry given the deterioration of the government’s creditworthiness.