The
European Central Bank (ECB) is threatening to withdraw emergency
funding from Greek banks if the Greek government doesn't do what it
wants.
The central bank's actions toward Greece occur
less than two months after secret letters revealed that the ECB
threatened to pull emergency funding from Irish banks if the state did
not apply for a bailout, in what
many saw as an overreach into the sovereign affairs of the country. The
ECB later pretended that Ireland had applied for its bailout
voluntarily. The letters revealed that in fact the ECB had required the
Irish government to apply.
It is one thing for the ECB to require
individual banks to follow certain technical rules to maintain their
liquidity. It is quite another for the ECB to pressure a government by
threatening an entire nation's banks with a sudden default by yanking
their liquidity en masse.
That's what is going on now with Greece.
The new Greek government, led by the left-wing
Syriza party, is attempting to renegotiate the terms of its bailout deal
with the so-called Troika. The Troika consists of the ECB, the European
Commission, and the International Monetary Fund (IMF).
Syriza wants a shift in the focus of "structural reforms" toward increasing tax collection and government efficiency and away from crude budget
cuts; a "European debt conference" to renegotiate the repayment terms
on the country's debt (including linking interest payments to growth and
writing down some of the debt); and a reduction in the government budget surplus the country is required to run.
The Troika wants to keep the current deal, which requires the Greek to run a budget
surplus (with a target of a 4.5% surplus in 2016) and implement a
programme of reforms to bring government debt down from its current 175%
of GDP to 124% by 2020.
The country's access to the funding from the
central bank that supports its banking system may be cut off at the end
of the month unless a compromise is struck. This, at least, is the
message coming from members of the ECB's governing board.
SyrizaAlkis Konstantinidis/ReutersHead of
radical leftist Syriza party Alexis Tsipras after winning elections in
Athens, Jan. 25.
Currently Greece enjoys special dispensation
that allows its banks to use Greek government debt and
government-guaranteed bank debt as collateral in exchange for funding
from the central bank, despite being rated as "junk." This waiver was
granted as part of a deal under which the country committed to undertake
a package of structural reforms insisted upon by the Troika in exchange
for bailout money.
Yet, as Bloomberg reports, ECB Vice President
Vitor Constancio told an audience at a conference in Cambridge, England,
last week that renegotiation of that deal could put the country's banks
at risk. "There will be no surprises if we find out that a country is
below that rating and there's no longer a program that that waiver
disappears," he said.
If the waiver is withdrawn, then Greek banks
will no longer be able to exchange the bonds on their balance sheet for
ECB loans. Without that support, the sector could face widespread
bankruptcies and could in turn push the country closer to collapse.
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