February 11th, 2015
in Op Ed
by Dirk Ehnts, Econoblog101
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 Eurosystem monetary policy operations despite the fact that they did not fulfil 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 programme review and is in line with existing Eurosystem rules.
This could mean that Greek banks have a problem. They use Greek government bonds as collateral for loans from the ECB. These loans create deposits at the Greek central bank, which banks could then exchange into cash. No more from February 11th:
The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).
This is basically what was done to Cyprus. Greek banks are doomed if they cannot produce any more euros in cash. If - and that is a big if - Greek banks would have to close, than it probably does not make much sense to open them up again with Greece being a member of the euro area. The Greek government might as well decide to introduce a new currency. However, as El Publico reports, the Greek banks have been authorized to use €10 billion in emergency funds. The Greek government concludes that there is no liquidity problem. Frances Coppola points out that Varoufakis has seen this ECB policy coming six month ago, as an exchange on Twitter shows. The coming weeks should feature a discussion on whether the ECB is allowed to cut liquidity provision to a member state government. I would tempt to think that it is not within the mandate of the ECB to cut off some banks in one nation. Here is what the ECB says about itself (my highlighting):
The Treaty provisions also imply that, in the actual implementation of monetary policy decisions aimed at maintaining price stability, the Eurosystem should also take into account the broader economic goals of the Union. In particular, given that monetary policy can affect real activity in the shorter term, the ECB typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective.
On a side note: the Greek government's suspension of talks with the troika is supported by the statement from the European Court of Justice in mid-January:
Thus, in the event of the OMT programme being implemented, the ECB must, if the programme is to retain its character of a monetary policy measure, refrain from any direct involvement in the financial assistance programme that applies to the State concerned.
One wonders what kind of construct will replace the troika. European institutions dictating policy to member countries will not increase the image of the European Union, especially if they force countries to give up on public goods like health care, education, etc. The political survival of the EU is more uncertain than ever, it seems.