BackGreece loses ECB funds, raising pressure to yield to austerity
The ECB's decision will raise financing costs for Greek banks and stiffen oversight by the central bank
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Frankfurt/Athens: Greece lost a critical funding artery as the European Central Bank (ECB) restricted loans to its financial system, raising pressure on the 10-day-old government to yield to German-led austerity demands to stay in the euro zone.
The ECB’s decision, announced at 9:36pm on Wednesday in Frankfurt, will raise financing costs for Greek banks and stiffen oversight by the central bank. Greece’s finance ministry said the decision doesn’t reflect any negative developments in the nation’s financial sector.
The next move is up to Prime Minister Alexis Tsipras, who swept to power promising to reverse five years of spending cuts that accompanied €240 billion ($272 billion) of bailout loans. The ECB move came hours before the Greek finance chief, Yanis Varoufakis, was due to meet Germany’s Wolfgang Schaeuble in Berlin and hours after he met ECB president Mario Draghi.
“The Greek government has realized handcuffs are a lot tighter than they expected," Paresh Upadhyaya, Boston-based director of currency strategy and portfolio manager at Pioneer Investment Management Inc., which oversees about $248 billion. The ECB’s message was “‘your predecessor signed on to the programme and that’s why you got the assistance, you can’t just back away from that,’" he said.
Greek stocks and the euro fell after the ECB statement. The Global X FTSE Greece 20 ETF of Greek stocks plunged 10.4% in New York trading. The single currency slid 1.2% to $1.1345 at 5pm in New York.
The ECB hadn’t publicly signalled that it would take such action so soon. On 8 January, the central bank said it would continue the waiver on the assumption that Greece would conclude a review of its current bailout program, which expires 28 February, and negotiate another one.
Loan costs
A Bank of Greece spokesman said that liquidity will continue as normal, as existing ECB financing will be converted into Emergency Liquidity Assistance, or ELA. The official asked not to be named in line with policy and declined to answer all other questions. A spokesman for the Greek government didn’t respond to two phone calls seeking comment.
“The Greek banking system remains adequately capitalized and fully protected under Emergency Liquidity Assistance," the finance ministry said in a statement. The government remains steady on its programme of social salvation and is negotiating to draw up European policy “that puts an end definitively to the now self-reinforcing crisis of the Greek social economy," it said.
ELA is priced at an annual interest rate of 1.55% compared with the current ECB refinancing rate of 0.05%, Bank of Greece governor Yannis Stournaras said in an interview with Kathimerini newspaper in November.
‘Warning signal’
“You have to keep in mind that the Greek banking system used the ELA very extensively in 2012," Steven Englander, the global head of Group of 10 currency strategy at Citigroup Inc. in New York, said. “So it’s not going beyond break. It’s a warning signal that the patience isn’t infinite."
The ECB also has the power to refuse permission for the Greek central bank to supply funds under ELA, and reviews the procedure every two weeks.
As Greece’s creditors line up to oppose the country’s demand for a debt restructuring and rolling back austerity, Tsipras’s refusal to accept more bailout loans may result in a cash crunch as early as next month, two people familiar with the country’s financial position said.
Taking chance
Days after taking office, Varoufakis said he was willing to take his chances without a bailout deal, saying the demands to cut spending were too onerous and had damaged the economy too much.
“The Greek state has a future, but what we won’t accept as a future is the self-perpetuating crisis of deflation and unsustainable debt," he said.
The ECB’s move may be the harbinger of a harder stance by euro-area creditors. In order for the government to pay its bills beyond next month, it needs the so-called troika of ECB, European Commission and the International Monetary Fund (IMF) to agree to lift a €15 billion ceiling on the amount of short-term debt it can issue.
Coming to table
The ECB decision “does show that reality is going to set in at some point," Axel Merk, president and founder of the Palo Alto, California-based Merk Investments Llc, said in a telephone interview. “The ECB says ‘let’s come to the table and talk about this but until you do that, we’ll abide by what we have in the agreement.’"
While Tsipras has retreated from demands for a writedown of Greece’s debt, yielding to virtually unanimous opposition in the 19-member euro bloc, his pledge to increase spending threatens to collide with conditions of aid commitments.
Tsipras and Varoufakis will have visited seven European cities between them this week after their Syriza party’s won 25 January elections on an anti-austerity platform. Their demands for overhauling the terms of Greece’s bailout package have been met with resistance and alarm in Berlin and Brussels.
German chancellor Angela Merkel indicated Wednesday that their diplomatic offensive was failing to win over converts.
“I don’t think that the positions of the member states within the euro area with regard to Greece differ, at least in terms of substance," Merkel told reporters in Berlin. Later in Paris, Tsipras was told by French President Francois Hollande that “respecting the rules is necessary for all, for France too, and it’s not always easy." Bloomberg
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