As discussed elsewhere in this blog (see here), Greece has few remaining sources of funding, primarily its own commercial banks purchasing T-Bills through liquidity drawn via ELA authorised by the BoG. The ECB has restricted the use of ELA, and the government’s ability to issue T-Bills. When some are repaid in the next few weeks, the government will be able to draw some more money out of this, but the ECB is now prohibiting Greek commercial banks from buying more, arguing that this endangers them, due to excessive exposure to a soon to be bankrupt sovereign. How confidence inspiring is this?
So much for the ECB being the fireman of the Euro-crisis (see here). At a time that the ECB is engaged in QE, it is prohibiting Greece from drawing liquidity through any source. This supposedly in the aims of promoting systemic stability? This is more like a declaration of war on the Greek economy, the fate of which is on the hands on savers who are rushing to withdraw funds from banks. These latest actions of the ECB threaten turning the slow motion credit leak into a full blown bank run. Is this what Draghi is trying to do? The only option is to go begging the Eurogroup to release some money. Some respect for democracy!
If the government does not prostrate itself at the Eurogroup, Greece is about to default and Tsipras will need to make the choice whether to default internally (stop paying pensions and wages) or externally (not pay IMF, ECB, redeem T-Bills). He will choose external default and then we have to either discuss the effects of a default within the Eurozone (see here) or Grexit.
Here is some evidence from today’s press:
Greece remains very much in focus today though local markets are closed for Independence Day. The government has reportedly been resorting to swaps with various government arms (e.g. public health fund and Athens metro) to raise short-term cash. The ESM meets and appears to be possibly preparing for some micro-tranche payment as early as next week, If the Greek government submits, for the third time, a set of reform proposals that its official creditors will find credible. The ECB will also hold a call today and may expand ELA funding authorization, but Greek banks have been banned from buying any more government T-bills.(click here for source)
According to sources, the ECB instructed Greece’s biggest banks to refrain from adding (short term) Greek government exposure. More specifically, the ECB puts their recent warnings on capping Greek T-bill holdings at Greek banks in a legal framework. Currently, Greek banks hold around €11B of T-bills, while the Greek government has a Troika-induced limit of €15B T-bill issuance (total amount outstanding). The new legal framework by the ECB would thus imply that Greek banks can’t cover this possible €4B shortfall if foreign investors don’t re-invest their maturing T-bills. It would be another blow to the Greek government’s short term liquidity situation with a €1.7B bill for wages/pensions (end of month) and a €0.45B IMF payment looming. On another level, the ECB already has an official cap on the amount of T-bills Greek banks can use for funding through ELA (€3.5B). Today, the central bank meets again on extending this emergency liquidity line. (click here for source)