As we indicated, we’ve thought the ECB was unlikely to end the ELA as a way to force Greece to capitulate, since it would be too obvious a move to take down the Greek banking system, and would also have the effect of telling depositors in any European debtor state that their money was not safe in a domestic bank. That over time is a way to precipitate bank runs.
But we also pointed out that the board, which rotates at the ECB, had a particularly Greece-unfavorable mix this time. And while more extreme measures, like imposing conditions on the ELA, requires a 2/3 vote, the decision to increase or not increase the size of the facility take a mere majority vote.
So if the bloody-minded board members refuse to honor Greecee’s request to increase the backstop during the board meeting today, it would constitute a serious step to try to force Greece to capitulate. However, most experts believe this would be such a radical step as to be unlikely. And the board mix for each of the two ECB sessions in March is much Greece-friendly.
European Central Bank policymakers debated on Wednesday whether to allow more emergency funding for Greek banks with opinions divided as Athens came under pressure to accept an extended aid-for-reform programme…
The ECB’s policymaking Governing Council was meeting to decide how far the cash-strapped country may support its troubled banks, which are suffering rising deposit outflows due to the political uncertainty.
While the ECB is unlikely to lower the ceiling on emergency lending assistance (ELA) by the Greek central bank, a refusal to increase it would be bad news for the banks, which are close to using up the full 65 billion euros granted so far…
Opposition in EU paymaster Germany will make it difficult for the ECB to cut Athens any financial slack although other countries are in favour of doing so.
Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, opposed any increase in the cap, the sources said.
But while some governors share his reservations, others want more leniency.
One eurozone central bank official forecast a “slight increase” in ELA for Greece, stressing that the ECB “has to try to preserve financial stability” and “its role is not to teach Greece some kind of lesson”….
A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.
There was a lull on Monday but deposit outflows picked up again on Tuesday after talks collapsed, the banker said. ECB officials are keeping tabs on such movements daily, people familiar with the matter said….
One senior official said that ECB President Mario Draghi would turn first to European leaders to guarantee the solvency of Greek banks before considering whether to pull the plug on emergency liquidity.
Were the ECB to cancel all emergency funding, as it threatened to do with Cyprus in 2013, it would force Athens to choose between striking a new deal with its international lenders or facing bankruptcy.
“Pulling the plug on Greece would have potentially catastrophic consequences,” said Ashoka Mody, a former IMF official who helped design Ireland’s bailout.
“The ECB’s threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it.”
Unfortunately for the Greek government, pulling money out of Greek banks is an entirely rational move, but amounts to Greek citizens acting against the government despite their overwhelming support for its aims.
The meeting is expected to run into the evening in Europe, which means we should see a press release shortly.
Update: The ECB increased the ELA, but as modestly as possible. From CNBC:
The European Central Bank has approved a €68 billion ($78 billion), two-week extension on emergency liquidity for Greek banks, Reuters reported, citing a source.
The ECB had already raised the Emergency Liquidity Assistance (ELA) cap to about €65 billion last Thursday. The Greek central bank had requested an extension of about €10 billion, the source told Reuters.
Warren Mosler wrote:
As previously discussed, and relayed to the finance minister in Greece, there is no reason to assume the ECB will cut off liquidity to Greek banks.
First, those banks are private institutions, and regulated and supervised by the ECB, who has deemed them ‘solvent’ and ‘adequately capitalized’ and therefore eligible for liquidity support as members in good standing.
Think of it this way, if NY went rogue, would the Fed cut off Citibank?
The only problem with this comparison is that Citibank is systemically important and none of the Greek banks are. But not supporting the Greek banks would be a dangerous precedent politically and economically.
Recall that the ECB increased the ELA to Greece between meetings by €5 billion, so they could nudge the amount up again if need be.