5 Feb 2015

ECB cancels soft treatment of Greek debt in warning to Athens

The ECB in a dramatic move last night pulled the plug on Greek banks ability to use Greek sovereign bonds as collateral in borrowing from the ECB. It is not a killer move – because it means Greek banks are now totally reliant on the ECB for funding emergency funding.

This graph shows the relative amounts of “normal” and emergency lending Greek banks had to take from the ECB over the crisis years.


But it is a significant move, as always justified by “the rules”, to put pressure on Greece to do a deal.​

The deal Germany wants was signalled in a leaked negotiating paper: the total reversal of the elected Greek government’s policy of cancelling austerity, even down to detail about ending reforms to the structure of ministries.

The move caught Greek negotiators in Berlin off guard. Syriza sources were last night puzzled as to whether it was a move by the ECB to pressure the politicians to find a solution, or pressure on them to comply. As always when playing with the future of 11 million innocent and powerless people, the level of puzzlement is frightening.

Read more: Greece – the Samson Strategy

I read it as an attempt by central bankers to exert their power, as the elected politicians look set to leave Greece negotiating space, and time, over the wider debt deal. Others see it as merely ensuring there is a single trigger and a single date on which it can be pulled, and that there is no change of situation.

In the end, this crisis will be resolved either by politicians, waiving rules, or central bankers sticking to them. If the latter there is little alternative but to force Greece into a u-turn, or to leave the euro.

In this regard the move has already had impact. My social media feeds, and those of people I follow, are now reflecting Greek sentiment changing towards euro exit. The total lack of transparency (who voted? why?) and the right time melodrama from a central bank have made people wake up uncertain about what their central bank is trying to do.

There is a deluded view among some financial analysts that the Greek government is in the process of doing a giant u-turn, and will end up obeying Brussels and Frankfurt to the letter, as its predecessor did.

As I have repeatedly blogged, on the basis of well authoritative briefings, the Greek radical left party Syriza does not want to be in power unless it can make significant reforms to the welfare, pension and privatisation programme imposed by 2012.

As everybody stares over the abyss it’s worth spelling out what that is: not immediate euro exit. If the ECB triggers a bank run in Greece, the government would likely resort to capital controls and seek bilateral funding outside the euro system. The Greek constitution also allows it simply to hand power back to the shattered, pro-Brussels centrist parties and let them self-destruct some more.

A lot now depends on how Greek depositors react. There is no logical reason for a bank run, unless the euro authorities inflame things with pronouncements in the next 24 hours, or some bust up occurs between the Syriza people in Berlin and German politicians. But financial contagion is never logical.

The issue is, finally, are the eurogroup political leaders prepared to eject Greece for breaking with the austerity programme. Or are they prepared to give Greece three month’s leeway.

To me this 11pm move, shrouded in overtones of night, fog and film noir drama, is evidence that there is nobody in overall control in the eurozone. And that the efforts of the politicians are in danger of being sunk by central bankers, with two small north European countries – Finland and the Netherlands – calling the shots, backed by the beleaguered conservative government of Spain.

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19 reader comments

  1. Susan Brewster says:

    ‘Just heard a German minister on Radio 4 reiterating the view that many if Greece’s problems stem from the richest sectors of their society failing to pay their taxes. Anyone see any parallels?

    1. Nick Paleonikolas says:

      Northerners, and Germans in particular have a thing with Greek Billionaires not paying their taxes. They also have a thing with Lazy Greeks doing the same. Evidently, the German view of Greeks is filtered through two dimensional prism of extremes.

      But look here:

      The Greek economy has been undergoing “structural reforms” for >5 years now, under Troika hegemonic supervision. A political tool, they, the Northerners set-up to control wayward profligate Southerners.

      It has proven to be disastrous. The experience for Greece is worse than the one the United States experienced under the Great Depression.

      Do the Math! The EU under the Merkel Schaubles regime has impoverished the Greek-Hellenic peoples for generations into the future. Why ?

      Because they, Northerners, Germany Holland Austria and Finland lust for the complete annihilation of the Greek Billionaire – This grouping of rich Greeks is the last pillar of Hellenic defense against complete subjugation of Greece. With their money, Greeks would resist hegemony and make a come back to rebuild Hellas, as a free and fully functioning independent Hellenic state.

      1. gaby de wilde says:

        if you replace “billionaires” with “tax evaders” you get a whole different story. The Greeks did 30 bl worth of tax evasion every year for decades.

        Why would such wealthy people need to be bailed out by much less wealthy EU countries? If we also didn’t pay tax how could we bail them out?

        It it a good plan? We all stop paying tax then complaint about the consequences?

      2. John Scully says:

        gaby there was a tacit agreement between greek citizens and the state – we give you no services and you pay me no taxes. Having said that we have heard, ad nauseatum that the greeks have the most bloated civil sector all of which pay tax at source, the remainder the so called productive sort, paid, but paid poorly. This is not the problem, the debt is fiscal, so where did all the money go, bribes, armaments, poor administration, NGOS, transfer fees, the list is long.

        All valid – has any of this changed over the last 5 years under austerity, no it hasn’t although steps have been made – political will has not been in the fight , have the previous centrists performed credibly according to their masters, yes they have, with warm approval all round. There are too many contradictions to allow for a single dimensional view of good north bad south. There is in fact a great deal of collusion – and greeks know that a change is needed. This is what has been asked for.

  2. Boffy says:


    Does this limitation on Greek banks holding Greek sovereign debt apply to the Greek Central Bank as well as the commercial banks? If not, and possibly even if it does, this may not be a restriction further down the road, it seems to me the solution is simple.

    In a sense, money is simply a metric for measuring value, in just the same way as you decide to use metres rather than yards. So, it is quite possible for Greece to continue to denominate prices in Euros rather than Drachma, just as in the past economies denominated prices in quantities of gold rather than silver or vice versa. Prices are after all, as Marx demonstrated only such an expression of the value of one commodity in relation to this other agreed universal commodity.

    In that case, whatever the ECB might decide, Greece could continue to use the Euro as its currency unit. The problem then is, where does an economy get these currency units from? Historically, that was a problem of where do I get gold or silver from to use as money? The limitation of that, and the cost was one reason for economies using money tokens rather than precious metals. Its also one reason that credit-money developed, which means that no actual money commodity needs to be present.

    If Greece needed actual money tokens in the shape of notes and coins, it would be a problem, because, the ECB has a monopoly over their production. Simply producing your own copies of them would leave you open to being charged with forgery.

    However, most money in economies today is not of this type. It is electronic money. It is money that the central banks create, by simply creating deposits in the accounts of commercial banks, and in their own accounts. The Greek Central Bank, if it is allowed to buy Greek sovereign debt, could simply take in Greek bonds, which then sit on its books as bank capital to that nominal value, and the Greek Central Bank could then place an electronic deposit in the account of the Greek Government to that amount. This is basically how all quantitative easing occurs. There seems no reason why the Greek Central Bank cannot undertake this function any less than the ECB does.

    In fact, most banks across Europe have on their books basically worthless assets such as properties that whose nominal values are astronomically inflated, and mortgages based upon them, most of which are likely to default. So, there seems little reason why the Greek central Bank should not hold Greek Sovereign debt.

    In fact, if the ECB tries to play hardball along with Germany, rather than actually exiting the Euro, which would set a path for EU exit too, I see no reason why Greece could not simply announce that it was continuing to use the Euro as its currency, and why its central bank should not carry out the operations described above, irrespective of whether the ECB gave its blessing or not.

    On this basis, the Greek government would have Euros in its account, provided electronically by the Greek central bank, and could continue to pay wages, and other bills. They would be paid electronically into the accounts of recipients. No additional notes and coins are required.

    The only problem arises when Greece comes to pay external creditors. But, that highlights a point I have made previously that what Greece needs is not money, but capital.

  3. Christine Chambers says:

    The tactics of the ECB, a bunch of unelected bankers demonstrates that is financiers and not democratically elected Governments which really rule over us. This is unacceptable.
    Sure, Govts. should pay back debts but also banks should too. In the UK according to National Audit figures the bank bailout here cost £850 billion, and apparently somewhere between £50-80 billion will never be paid back to the public purse. Yet no signs of austerity in the City.
    I admire Syriza for having the guts to try and take power back for the people.

  4. Nikoletopoulos says:

    Hi from Athens.
    There is no bank run the people in a majority of over 90 % have less than 1500 Euros in the bank. What possibility for a Bank run. The authorities will be examining all large transaction exiting the country as i hear. So what Bank run? Let us get serious.

  5. Tim says:


    I suggest you have a look at this: http://russeurope.hypotheses.org/3395

    Things may be a lot more subtle than the surface indicates.
    It is explained in more details here:

  6. JonR says:

    Thanks for the blog Paul

    Strikes me in layman’s terms if the analogy from Yanis Varoufakis for the past week has been a household struggling to service it debts, then this is the scene where a branch cashier gleefully takes the card from the customer and reaches for the scissors. One senses an endgame, in which the power brokers might do well to consider core European values, which aren’t single currency, integration or federalism, but Liberté, égalité, fraternité

  7. Frank Witte says:

    It is hard to believe how the technocrats of the ruling parties bot in North and South have let it come to such a situation. Visionlessly driven forward by popular under-belly sentiment and with the completely erronous ‘normal household metaphor’ of state budgets and debts in their minds they march straight into the abyss. All that while on the Eastern Borders of this EU the all consuming fire of war has ignited and is slowly gaining access to toxic oxygen again. And the UK is run by people who believe that all will be well as long as they stay out of it … the first class passengers of Titanic who believe that in the end only the third-class will suffer and drown.

    Europe is in a mess, but not because the European Idea was a mess. But because it has been left into the hands of incompetents.

  8. joseph Halevi says:

    Excellent post. The line on the leaked German document (where can it be found?) and the last paragraph about the combination of NL+Finland with Spain is most interesting. I think that behind all that there is also the Governor of the Bundesbank.

  9. Derek O'Flaherty says:

    At a guess, one third to a half of the Eurozone population is praying for and willing Greece to get out of the eurozone and blaze a pathway for the rest of us out of what, more and more, is starting to look like a prison run by cosssetted politicans and bankers bungling and stumbling about as they destroy more and more lives.

  10. Nigel Wilson says:

    This has the distinct feel of the summer 1914 about it. Lots of posturing but nothing sensible. Similar cast.

    Can the Euro even survive Grexit? Let’s play dominoes.

  11. John Kerr says:

    ‘…playing with the future of 11 million innocent and powerless people’? Shurely shome mishtake? They are certainly not powerless, as this affair is demonstrating – as you point out it’s becoming an arm wrestle between the bankers and the politicians.

    I like the ‘film noir’ comment at the end…

  12. Maria KM says:

    Just to say a big thank you for the insightful analyses. You help us make sense of this information overload…

  13. Phil Blomer says:

    As ever, great analysis on Greece. It’s a joy to get an analysis that treats Syriza as a serious and democratic political force.
    As we all get drawn into the drama of the international stand-off and shoot-out, please keep bringing in:
    The human impact of what is being fought over – an opportunity to end the loss of dignity and freedom that the extraordinary austerity is driving into the majority of Greek homes and lives
    The unequal distribution of pain in Greece with an elite that has cushioned itself from austerity
    The national politics – the ‘Structural Reform of the Left’ to end corruption, tax evasion, and nepotism at the highest levels.

  14. Nick the Greek says:

    It is Ironic – that Nordic Europeans should be spending their hard-earned Tax Euros to see Lazy-Greeks and Billionaire Greek Oligarchs…enjoy themselves.

    This is the perception of Greeks in Euro Northern Hemisphere. Greeks are portrayed through two-dimensional prism of extremes. Lazy, on the one extreme. Despised Billionaire Oligarchs who never pay Taxes, on the other extreme.

    It is very Ironic – that Greeks can no longer afford to enjoy themselves, yet Nordic Europeans are still paying, spending their hard-earned Tax-Euros watching Greeks suffer the effects of Troika administered Austerity.

    Conclusion: Northerners do not like to pay for Southerners enjoying themselves. They would rather pay truck-loads of money more, to see Southerners feel the pains of Austerity.

    Economic and Political Logic dictates: It’s not about Austerity – It’s about Northerners loathing Southerners. They would rather pay more to see Greeks suffer the pains Austerity than watch Greeks enjoy the Mediterranean life-style, a life-style much written about, depicting the health and happiness of those that live it!

  15. R M says:

    Erskine Childers, July 1914 … Yes, overtones of that. And very film noir. Thank you, Paul, but why aren’t the decision-makers and policy-makers able to see this? A pandemic of collective blindness? Troika – hmm. Day of the Triffids?

  16. VN Gelis says:

    Pushing Greece to exit the EZ wont save the EU it will imply it is in a process of disintigration. That will imply that it is each nation for itself. If Greece exits the EU can forget is E300 odd billion, they will receive it back in Drachmas and all the contracts signed by Venizelos granting the creditors the right to Greek property in foreign courts will go out of the window. Have we arrived at this stage?

    From Syrizas pronouncements they aren’t changing their govt announcements of their programme so it beocmes difficult to see how the circle is squared or going to the brink may be a way of tapping into the BRICS bank as opposed to the IMF. Lets see who blinks first. Sacked ERT workers have planned to go to the building on Wednesday so will the police stop them from going in and will the riot police stop people from going into Parliament if Syriza backtracks?

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