Thursday, February 5, 2015

European Central Bank puts squeeze on Greek financing

As of February 11th, the European Central Bank(ECB) will not accept Greek sovereign debt as collateral for liquidity operations.

A press statement by the ECB cited as a reason for this move that the bank could not assume that there would be a successful conclusion to the current Greek program. The bank does not envisage Greece as complying with the existing bailout rules. Greek finance minister Yanis Varoufakis has already indicated that he would not meet with the Troika who are overseeing the present bailout. He indicated that a new financing program should be negotiated with EU leaders. The ECB has been waiving minimum credit rating requirements for Greek marketable sovereign debt instruments. The waiver had allowed Greek sovereign debt instruments to be used in Eurosystem monetary policy operations even though they lacked the minimum credit ratings that otherwise are required for such use. This waiver will now be lifted and so the sovereign debt can no longer serve as collateral.

 A similar action was taken in 2012. In response to the move, the Greek central bank issued Emergency Lending Assistance (ELA) an operation outside normal ECB monetary policy. Bloomberg notes: It is clear from the press release that the governing council also approved the Greek central bank issuing Emergency Liquidity Assistance to the Greek banking system to cover any liquidity shortfall caused by today's move. Greek banks have reduced their exposure to Greek sovereign debt since 2012 and so are now less reliant on that debt to use as collateral. The banks have non-sovereign debt they can still use as collateral.

 The announcement of this restriction of Greek banks access to credit came just hours after the Greek Finance Minister Yanis Varoufakis met with the ECB head Mari Draghi in Frankfort. Varoufakis is trying to convince Draghi that Greek debt payments could be linked to debt swaps, in which present debt would be switched to instruments in which repayment would be linked to Greek economic growth. Perhaps Draghi is sending a message to Varoufakis that if he will not go along with the processes or terms of the bailout deal, then he will not get the credit terms that were part of the deal.

Prime Minister Tsipras remains optimistic: "The debt must become viable, this is what we must discuss. I am convinced we can work together to get out of the crisis in Greece and to help Europe overcome the crisis." Earlier Wednesday, Tsipras met with the three top officials in the EU institutions. EU Commission President Jean-Claude Juncker, European Council President Donald Tusk and president of the European Parliament Martin Schultz. Schulz called their talks "fruitful" but that there were difficult times ahead. In an interview with a German newspapers, Schultz warned that if Greece did not honor its commitments, it risked bankruptcy:"If Greece unilaterally changes the agreements, the other side is no longer obliged to stick to them." The announcement that Greek sovereign debt can no longer serve as collateral reinforces this message.

The current loan program will end on February 28. Greek Finance Minister Varouflakis wants to obtain bridge financing to tide Greece over until a new debt regime is negotiated. The finance ministers of the Eurozone are due to meet on February 11 to discuss the Greek proposals for restructuring its debts. Varouflakis has already caved on the issue of writing off a considerable portion of the debt as he had originally demanded. Now he is suggesting a debt swap that would make payments depend upon Greek economic growth. This change at least avoids the present debt trap.

On Thursday, Varoufakis will meet one of his fiercest critics, German Finance Minister Wolfgang Schaeuble who says bluntly: "Elections change nothing. There are rules." This is an excellent summary of the role democracy plays in the economics of the capitalist elites.

No comments: