Another euro stitch unpicked

Agora Contributor: Nick Malkoutzis
Photos by Dennis Skley via Flickr https://flic.kr/p/qcppmH
Photos by Dennis Skley via Flickr https://flic.kr/p/qcppmH

If there was any doubt that the negotiations between the new Greek government and its lenders are going to be incredibly tense, there isn’t now. The European Central Bank’s decision on Wednesday night to stop accepting Greek government bonds as collateral from local lenders has minimal practical impact in the short-term but maximum effect in symbolic terms.

There has been some fine analysis of this decision already:

Here’s Frederik Ducrozet, chief economist at Credit Agricole:

“The bottom line is that ECB’s decision is a risky, albeit calculated political move, pressuring the Greek government and Eurozone policymakers to find an agreement within the next couple of weeks. It's a bad news in the sense that it goes against Greece's proposal to buy time in the negotiation process. In the end, the decision to pull funding has to be a political one, so even in the extreme case where there is no agreement by early March, we find it hard to imagine the ECB intentionally triggering a bank run.”

Silvia Merler, an affiliate fellow at the Bruegel think-tank:

“The ECB - who, according to European Cout of Justice’s advocate general, should not be in the Troika - is unilaterally declaring that a successful conclusion to the Troika review cannot be “assumed”.  The sudden character of this move may appear puzzling at first, but in fact it reveals the uneasiness of the ECB in its hybrid and ill-designed role... The preemptive move of the ECB protects formally the central bank’s independence, but it also forces the political game of next week, well beyond the limit of a central bank’s remit.”

Financial blogger and associate editor at pieria.co.uk Frances Coppola:

“The ECB is acting far beyond its mandate in seeking to influence negotiations between Eurozone member states regarding the terms and conditions under which member states lend to their distressed partners... Varoufakis is gambling that the Eurozone, and more particularly Germany, will not dare to push him off the cliff because of the consequences for international political relations. If Germany was seen to force Greece out of the Euro by refusing to negotiate, it would become an international pariah.”

And finally, Karl Whelan, professor of economics at University College Dublin:

“At least, unlike in its previous “Fight Club” days, the ECB now admits that ELA is available and will step in to take the place of the regular Eurosystem lending that has been revoked. So there are no immediate implications for liquidity provision to the Greek banks. The ECB is flexing its muscles, letting everyone know that are very close to pulling liquidity from Greece but no funds have been withdrawn yet.”

Perhaps the only thing missing from the debate is the Greek perspective. The SYRIZA-led government has reacted coolly to the ECB decision, interpreting it as a message to both Athens and its eurozone partners to come to an agreement soon.

“By taking and announcing this decision, the European Central Bank is putting pressure on the Eurogroup to move quickly to seal a new mutually beneficial deal between Greece and its partners,” said the ministry in a statement released early on Thursday.

While this may appear like a case of denial, the new coalition is left in no other position than to downplay the significance of the ECB’s decision and to ensure that Greek depositors do not panic about the fragility of their banking system.

“According to the ECB itself, the Greek banking system remains adequately capitalized and fully protected through its access to ELA,” said the Finance Ministry.

As long as Greek banks are able to maintain access to liquidity through ELA then there is no reason for panic at home and the coalition can keep negotiating abroad. Greek lenders still have almost 40 billion euros of EFSF bonds they can use as collateral for ECB financing. But the room for manoeuvre will be tight if depositors are spooked by the ECB’s decision. Under some circumstances, this could even convince the government to pre-emptively adopt capital controls.

Amid political uncertainty, about 15 billion euros was withdrawn from Greek banks in December and January, which is much higher than usual. While ELA could support a bank jog for a while, allowing Finance Minister Yanis Varoufakis to try to carve out a new deal with the eurozone, the government had also been hoping that it could cover its funding gap in the short-term by issuing T-Bills, for which Greek banks would probably be the only bidders. A six-month T-Bill issue on Wednesday attracted the lowest bid-to-cover ration since July 2006 as Athens raised 812.5 million euros at a higher yield of 2.75 percent.

The central bank also holds the cards in terms of allowing Greece to issue T-Bills (Athens has already reached the agreed limit of 15 billion euros) and in continuing to approve the provision of ELA to local lenders at the fortnightly reviews in Frankfurt.

The ECB’s decision to lift its waiver on Greek government bonds risks snaring Athens in the pincer of declining deposits and insufficient public funds. This would limit the time and scope for negotiations with the eurozone as the prospect of banks running out of liquidity or the government defaulting would grow.

It is difficult to judge how Greek depositors will react. Clearly, the signs over the last two months suggest that there is concern, which could quite easily turn into panic if there is the appropriate trigger. However, there is also a sense that Greeks could dig their heels in if they feel that their country is being blackmailed or treated unfairly. The opposition parties have so far not tried to exploit the ECB’s decision politically by investing in fear even though this made up a big part of New Democracy’s election campaign.

The government will also be looking to people’s reaction to calibrate its stance in the ongoing negotiations. If it feels that people are remaining calm in the hope that a deal will be secured, this will be reflected in Varoufakis’s stance. On this point, it is worth noting that the ECB’s shot across the bows came before Greek Parliament was sworn in, before the newly elected Greek government had presented its policy programme and before a Eurogroup or European Council had taken place. Frankfurt will argue that this is confirmation of its independence but it leaves a poor impression its respect for the political process.

Greece is no stranger to being put in a tight spot by the ECB. In April 2011, the central bank’s then president Jean-Claude Trichet told Athens that it would pull the plug on Greek banks if it sought to restructure its debt. The ECB’s threat to cut off liquidity to Cyprus’s banks in 2013 is also fresh in the mind of most Greeks. The keener observers may also remember the central bank putting pressure on Ireland in 2010 to accept a bailout, on then Italian Prime Minister Silvio Berlusconi in 2011 and on Spain over reforms in 2011.

The problem with these decisions is that the philosophy which underpins them is that the euro is far from insoluble. Each threat or perceived threat unpicks a stitch in the fabric holding the single currency together. And, as time passes, the Greeks – at least - get an increasing sense that either they do not belong or they are not wanted. 

2 Comment(s)

  • Posted by: H.Trickler

    >"Each threat or perceived threat unpicks a stitch in the fabric holding the single currency together"

    This statement is only gray theory ;)
    In the real world, Grexit poses only a few technical and juristic problems that can be solved without any head aches.

    And certainly Greece would live happier with Drachma and Euro used in parallel.

  • Posted by: Dean Plassaras

    Nick:

    Use your brain for crying out loud.

    Every Greek politico who cooperated with Troika and the Beast of Berlin is now history. Papandreou, Papademos, Samaras, Venizelos. The message is simple: you cooperate and at the same time commit political suicide aka thrown into the dustbin of history.

    Why would another Greek government go up in smoke for capricious reasons?

    Ambrose Evans Pritchard says: It was in essence a political decision that goes beyond the Treaty authority of the ECB.

    They pre-empted elected prime ministers on an issue of enormous sensitivity, before key meetings held. Why not wait? It was Ultra Vires in spirit.
    The Greek collateral rules are arbitrary. They make these rules up as they go along, and change them at will. The ECB is not bound by rating agencies.

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