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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