Blog Post

ECB collateral damages on Greece

The European Central Bank’s Governing Council lifted the waiver of minimum credit rating requirements for greek government bonds which, until yesterday, had allowed banks to use them in normal ECB refinancing operations despite the fact that they did not fulfil minimum credit rating requirements. 

By: Date: February 5, 2015 Topic: European Macroeconomics & Governance

The European Central Bank’s Governing Council has lifted the waiver of minimum credit rating requirements for greek government bonds which, until yesterday, had allowed banks to use them in normal ECB refinancing operations despite the fact that they did not fulfil minimum credit rating requirements. The suspension of the waiver was justified on the basis that currently the ECB deems it “not possible to assume a successful conclusion of the programme review”.

As of December 2014 Greek banks were borrowing about 56 billion from the Eurosystem facility. 

The liquidity risk may be substantial. As of December 2014 Greek banks were borrowing about 56 billion from the Eurosystem facility. As collateral, they were pledging only a limited amount of government bonds (which were benefitting from the waiver that has just been removed). The latest available data from the bank of Greece in fact show only 12 billion of Greek government securities on the asset side of Greek banks.

Considering the limitations on the use of Treasury Bills (T-bills) in refinancing operations, Greek banks could have used at most 8 billion of government securities as collateral for their eurosystem borrowing. The rest, as very clearly explained by Macropolis and Karl Whelan, was collateralised using European Financial Stability Facility bonds (ESFS bonds) and the so called “Pillar II and Pillar III” instrument, such as uncovered government-guaranteed bank bonds. These Pillar II and III instruments – amounting to about 25 billion – were due to become ineligible for refinancing operations from 1st March 2015 anyway, but would still work for Emergency Liquidity Assistance (ELA) funding (although more expensively).

The removal of the waiver effectively means that the amount of Eurosystem borrowing that was collateralized with Greek government bonds (about 8 billion) would need to be migrated onto the ELA facility. As said, this would also be the case for the amount that is collateralized with Pillar II and III instruments, from 1st March. The EFSF bonds will likely remain eligible as collateral for normal operations.

The ECB statement made clear that liquidity needs of banks that were to have no “sufficient alternative collateral”, can be satisfied by the national central bank via ELA, which means greek banks would not be cut off. But there are two important things to notice.

liquidity needs could grow exponentially if Greek depositors were to be scared by this development 

First, liquidity needs could grow exponentially if Greek depositors were to be scared by this development and their withdrawals were to increase. Data from the central bank of Greece show a deposit outflow of 4 billion in December, and market estimates suggest a potential additional outflow of 11 billion at least during January, in the run up to the elections. Considering the sensitivity of Greek deposits in the past, and the precedent of Cyprus, outflows could grow substantially and banks’ liquidity need with them. New rules introduced in 2013 state that for ELA operations beyond 2bn, the Governing Council may decide to set a threshold. Under the new rules, migrating borrowing from regular eurosystem facilities to ELA strengthen the ECB oversight on it and introduces a very powerful trigger.

increasing ELA to Greek banks will be very controversial and possibly difficult

Second, increasing ELA to Greek banks will be very controversial and possibly difficult, if it were to become obvious that the additional funds are used solely to roll over massively the government T-Bills that come to redemptions in February and March. Actually, even the present amount of ELA could be at risk. Questioned over the Greek banking system on BBC Newsnight, the new Greek finance minister stated that the “disease” in Greece at the moment is that over the last five years “a problem of insolvency has been dealt with as a problem of liquidity”. It is unclear whether the statement was referred to the banks or the country itself, but either way it could put the ECB in a very complicated position when reviewing the ELA, as it amounts to an admission that the banking system is either insolvent or that it is partly using as collateral the debt of an insolvent country. This, is not compatible with the Eurosystem rules and it must be pointed out that since 2015 the ECB has also its credibility as supervisor – on top of its credibility as a monetary authority – to protect.

ECB move formally protects the central bank’s independence, but forces the political game

But even if the liquidity consequences could be manageable, the political consequences could be less so. The ECB – which, according to European Court of Justice’s advocate general, should not be in the Troika – is unilaterally declaring that a successful conclusion to the Troika review cannot be “assumed”.  The sudden character of this move may appear puzzling at first, but in fact it reveals the uneasiness of the ECB in its hybrid and ill-designed role. Given the recent positions of the Greek government, the Eurogroup – which is due to discuss the Greek situation next week – would most likely reach the same conclusion. If the ECB had let the politicians discuss first, and the Eurogroup had concluded that Greece is no longer under a programme, then the necessary conditions for the waiver on greek government bonds would have disappeared. The waiver would have anyway needed to be cancelled, with the difference that the trigger in that case would have been a political decision from the Eurogroup rather than from the ECB. The ECB’s preemptive move formally protects the central bank’s independence, but it also forces the political game of next week, well beyond the limit of a central bank’s remit.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic

Opinion

Politics, not policy will help Lagarde save the eurozone

Her success at helm of Europe’s central bank will depend on her ability to mend fences with hawkish policymakers.

By: Guntram B. Wolff and Rebecca Christie Topic: European Macroeconomics & Governance Date: November 4, 2019
Read article More on this topic More by this author

Opinion

How to ward off the next recession

Despite confident official pronouncements, the deteriorating state of the global economy is now high on the international policy agenda. The OECD recently revised down its forecasts to 1.5% growth in the advanced G20 economies in 2020, compared to almost 2.5% in 2017. And its chief economist Laurence Boone warned of the risk of further deterioration – a coded way of indicating a growing threat of recession.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: October 2, 2019
Read article Download PDF

External Publication

European Parliament

Challenges ahead for the European Central Bank: Navigating in the dark?

Since the second half of 2018, signs of a slowdown have been piling up in the euro area. The ECB will face major challenges in this potentially difficult period: its main tools are nearly exhausted, the monetary union in which it operates is still incomplete, and it lacks the understanding of what the ‘new normal’ looks like. The authors, therefore, urge the ECB to review its strategy and framework to be able to face these challenges.

By: Grégory Claeys, Maria Demertzis and Francesco Papadia Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: September 25, 2019
Read article More on this topic More by this author

External Publication

La Banca centrale europea

This external publication delves into the new responsibility given to the European Central Bank: supervision on banks in the euro-area. It tells its history and illustrates its functions, structure and responsibilities and the exceptional answers to respond to the "perfect storm" of the crisis.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 31, 2019
Read article More on this topic More by this author

Blog Post

Croatia’s path into the banking union

Croatia seems a suitable candidate for euro area accession: there is a tight peg to the euro, high public debt is coming down, and the banking sector is already dominated by euro area banks. But the Eurogroup has rightly targeted reforms of the state’s role in the economy as a precondition for participation in ERM II and the banking union. None of the announced reform plans are new or easily concluded within the timeframe that has now been agreed.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic

Blog Post

‘Lo spread’: The collateral damage of Italy’s confrontation with the EU

The authors assess whether the European Commission's actions towards Italy since September 2018 have had a visible impact on the spread between Italian sovereign-bond yields and those of Germany, and particularly whether the Commission’s warnings have acted as a ‘signalling device’ for bond-market participants that it might be difficult for Italy to obtain the support of the ESM or the ECB’s OMT programme if needed.

By: Grégory Claeys and Jan Mazza Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Priorities for the new ECB president

In this Director's Cut of 'The Sound of Economics', Guntram Wolff talks to two of the authors of Bruegel's memo to the new ECB president, Maria Demertzis and Grégory Claeys, to specify the most important issues at the beginning of this eight-year cycle and to clarify the parameters within which the new incumbent will have to work.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 4, 2019
Read article Download PDF More on this topic

Policy Brief

Preparing for uncertainty

Memo to the president of the European Central Bank. Grégory Claeys, Maria Demertzis and Francesco Papadia present the challenges that the next ECB president will face during the upcoming mandate, reinventing monetary policy in a system riddled with uncertainties.

By: Grégory Claeys, Maria Demertzis and Francesco Papadia Topic: European Macroeconomics & Governance Date: July 3, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: ECB monetary policy decisions deconstructed

In this Director’s Cut, Bruegel’s Grégory Claeys and Maria Demertzis take a deeper look at whether the monetary policy decisions made by the ECB over the past three presidential eras arrived by consensus, by unanimity or by majority votes of the governing council.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 27, 2019
Read article More on this topic

Blog Post

The evolution of the ECB governing council's decision-making

Before it is decided who will chair the governing council for the next eight years, the authors look back and examine precisely how decisions have been taken since the ECB was created – by unanimity, by majority, or by consensus.

By: Grégory Claeys and Tanja Linta Topic: European Macroeconomics & Governance Date: June 27, 2019
Read article More on this topic More by this author

Blog Post

GNI-per-head rankings: The sad stories of Greece and Italy

No other country lost as many positions as Greece and Italy in the rankings of European countries by Gross National Income per head, between 1990 and 2017. The tentative conclusion here is that more complex, country-specific stories – beyond the euro, or the specific euro-area fiscal rules – are needed to explain these individual performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 18, 2019
Read article More on this topic More by this author

Opinion

ΕΥΡΩΕΚΛΟΓΕΣ ΚΑΙ ΤΟ ΜΕΛΛΟΝ ΤΗΣ ΕΥΡΩΠΗΣ

Είναι γεγονός ότι οι τωρινές εκλογές λόγω της ανάπτυξης των κομμάτων του λαϊκισμού είναι κάπως διαφορετικές από τις προηγούμενες. Αλλά πιστεύω ότι όλες οι εκλογικές διαδικασίες, εθνικές και ευρωπαϊκές, έχουν πάντα πολύ μεγάλη σημασία γιατί θέτουν μια ατζέντα για τα επόμενα πέντε χρόνια και εμείς ως πολίτες καλούμαστε να επιλέξουμε τις σωστές προτεραιότητες και να δώσουμε την εμπιστοσύνη μας στους κατάλληλους ανθρώπους.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: May 28, 2019
Load more posts