Tsipras in Frankfurt: ECB Fires First Shot

With Greeks massing in Syntagma Square to back the new government in holding to its proposed debt-renegotiation and anti-austerity program, the European Central Bank has cut off the Greek banking system and government from credit. The ECB’s Feb. 4 action, enforcing the EU “hard line” against Greece’s proposals, disqualified Greek government debt as collateral for ECB short-term loans to Greek banks, thus effectively terminating between 30 billion and 50 billion euros of ECB liquidity credit lines to those banks.

The only potential substitute available to these Greek banks is a very partial one—liquidity loans through the more expensive Emergency Liquidity Assistance (ELA) program by the Greek Central Bank, at higher interest rates, and only with the permission of the ECB. The Greek government said Feb. 5 that the ECB had allowed an increase of this Greek National Bank program, but only by 10 billion euros and for one week, pending the Feb. 12 “Eurogroup” meeting of Eurozone finance ministers.

And for the Greek government, the ECB on Feb. 4 did not allow any increase in government Treasury bill issuance which the Greek banks can buy (currently 3.5 billion euros); in consequence, Greece itself now cannot borrow, even short-term, from those banks. It also cannot borrow more from the European Monetary Fund.

The ECB decision was made after its president, Mario Draghi, met with Greek Finance Minister Yanis Varoufakis. Afterward Varoufakis said,

Varoufakis also met today with German Finance Minister Wolfgang Schäuble in Berlin, which went as one could expect. After the meeting Schäuble said he and Varoufakis “agreed to disagree,” which was not really true, since Varoufakis said, “We didn’t even agree to disagree, from where I’m standing.”

Speaking from Venice (quite appropriately), the director of Germany’s Bundesbank, Jens Weidmann, warned Greece against using the ELA to prop up its banks. “ELA should only be awarded for the short term and to solvent banks,” Weidmann, who also sits on the ECB’s Governing Council of decision makers, told business daily Börsen Zeitung. “As the banks and the state are closely bound in Greece, the economic and fiscal policy course that the Greek government follows plays an important role in this assessment,” he said.

Since this issue is not even on the table, it can only be seen as a threat, since the ECB has to approve any request from ELA.