ECB ends Greek collateral waiver, ELA still available, Greek options limited

Last night the European Central Bank announced that it would no longer accept Greek government or Greek government-guaranteed collateral for loans. This step had been telegraphed for a month but the timing demonstrates how political an organization the ECB has become. Greek banks can still receive emergency liquidity from the Greek central bank, much as they did in 2012. But when this gets cut off, the Greek government’s negotiating options will narrow considerably.

The ECB issued the following press release last night:

4 February 2015 – Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations

  • ECB’s Governing Council lifts current waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic

  • Suspension is in line with existing Eurosystem rules, since it is currently not possible to assume a successful conclusion of the programme review

  • Suspension has no impact on counterparty status of Greek financial institutions

  • Liquidity needs of affected Eurosystem counterparties can be satisfied by the relevant national central bank, in line with Eurosystem rules

The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in Eurosystem monetary policy operations despite the fact that they did not fulfil minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules.

This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of Eurosystem counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing Eurosystem rules.

The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).

Lorcan Roche Kelly had a good and succinct analysis of the move at Bloomberg. The bottom line is that the move doesn’t have any immediate impact on Greek banks. I would make the following points:

  • The ECB warned a month ago that a cutoff debt for the Greek government collateral waiver was coming. The timing is suspect: According to a 8 Jan Reuters report the ECB warned it would eventually be forced to end accepting Greek government bonds as collateral, which is below investment-grade and not eligible as collateral for ECB loans without a waiver. “The continuation of the waiver is based on the technical extension of the European Financial Stability Facility program until the end of February 2015 and the existence of an International Monetary Fund program,” an ECB spokesperson said in a statement. “It is also based on the assumption of a successful conclusion of the current review and an agreement on a follow-up arrangement between the Greek authorities and the European Commission, in liaison with the ECB, and the IMF.” But the ECB has decided to act at the worst possible time, purposely injecting itself into the fraught negotiations between the Troika and the new Greek government in order to apply pressure on negotiating a deal.
  • This is not a total stop for Greek banks’ borrowing from the ECB but funding costs just went up. The ECB stressed in a tweet last night that though Greek government bonds no longer receives a waiver for acceptance as collateral, “Liquidity needs of affected banks can be satisfied by relevant national central bank, in line with Eurosystem rules”, meaning the Greek banks can always receive Emergency Liquidity Assistance from their respective national banks. ELA is available to Greek banks at a 1.55% rate versus the 0.05% rate for borrowing from the ECB. 
  • Greek banks can use other collateral at the ECB but this collateral is also limited. Greek banks have roughly 20 billion euros of Greek government debt on their books. And only 8 billion euros of Greek government debt was used as collateral for ECB loans. Another 25 billion euros of Greek government-guaranteed debt was used as collateral though. And this is the bigger problem for funding. That means 33 billion euros of assets are now ineligible for ECB loans and can only be used for ELA from the Bank of Greece.
  • The ECB can also suspend ELA but this is the Armageddon scenario. The ECB will have the Bank of Greece on a tight leash, watching over and reviewing its ELA program. Just as with Cyprus and Ireland (link here), the ECB can decide that Greek government and government-guaranteed debt is not eligible for emergency liquidity either. This is when we have a hard stop and Greece would be forced into default.

So, where do we go from here? First, Greek banks’ funding costs have just increased. And it is the Greek banking system where the rubber hits the road. Government debt default is not a terrible thing given ECB QE is designed to limit contagion. A Greek banking system collapse is what is the critical piece everyone is trying to avoid.

As I have noted earlier, the Greek government’s trump card is default. But in retrospect, the ECB’s initiating QE before the Greek election gives the ECB more leverage, as QE is now also a safeguard against contagion if Greece decides to default. A default will almost certainly mean Greek government debt is cut off from ELA financing and then a serious Greek bank run would be on and a eurozone exit would be a distinct possibility.

In the end, the ECB move thus narrows options for Greece’s government. It means that Greece’s best alternative to a negotiated agreement is default and banking system collapse. That will make negotiating on Troika terms more likely, which is surely what the ECB wants. But Greece could default anyway and let the chips fall where they may. Dangerous times

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