Depositors waited at a bank in Athens on Friday. Credit Thanassis Stavrakis/Associated Press
Europe’s central bank has been the lender of last resort for Greece, keeping its banking system — if not the country itself — from collapse. But the E.C.B. has also been among the most recalcitrant of its creditors, pushing Greece to the verge of default by refusing to offer relief on its heavy debts.
This tension in many ways mirrors Europe’s broader dilemma of how to handle Greece.
Should lending lines to the country be renewed, in the interest of keeping the eurozone intact? Or should Greece, having demanded too much from Europe, not be bailed out again?
On Monday, this will be the chief topic of discussion when eurozone heads of state gather in Brussels for an emergency summit meeting. Greece delivered a new set of proposals for a bailout deal to the top European leaders over the weekend.
But time is running out.
Frantic depositors were yanking over a billion euros a day from the country’s banks late last week, leading the E.C.B. on Friday to bolster the banking system for the second time in three days. Greek bankers say that the banks will soon have to close if this uncertainty continues.
Greece is just about broke and must pay $1.8 billion to the International Monetary Fund by June 30. So far, it has refused European demands that it cut spending and amend its labor laws in return for a release of frozen funds.
The E.C.B.’s exposure to Greece now stands at 150 billion euros, or $170 billion, according to Deutsche Bank. Of that, €122 billion is propping up the banking sector through an emergency lifeline and other funding, and €27 billion comprises longer-term Greek bonds.
At 83 percent of the gross domestic product of Greece, the bet is substantial. Relative to the size of their economies, it is larger than the lifelines doled out to other bailed-out countries such as Cyprus and Ireland, and it underscores the lengths to which Europe has gone to keep Greece afloat.
“The E.C.B. is playing a critical role,” said Mark Wall, the chief economist at Deutsche Bank in London. “It is the primary financier of the Greek banking system — which is the pressure point for Greece as a whole. Without the E.C.B., there is nothing to avert a collapse of the Greek banks.”
But in the eyes of the near bankrupt Greek government, the E.C.B. has been less the firefighter putting out a blaze than the executioner ready to deliver a final ax blow.
That is a result of the hard line taken by the E.C.B. over the Greek government bonds it bought five years ago. They were not included in the 2012 restructuring for private sector bondholders, meaning the Greek government is still making full payment on the debt.
To keep from defaulting on these bonds, Greece must pay €6.7 billion to the European Central Bank by the end of August, starting with a €3.5 billion installment on July 20. One of the core areas of disagreement between Greece and its creditors is over these obligations.
The Greek finance minister, Yanis Varoufakis, has on several occasions asked the president of the European Central Bank, Mario Draghi, to grant Greece relief on these debts.
Other European countries and the I.M.F. have shown some flexibility in terms of Greece’s debt obligations. The E.C.B. and Mr. Draghi have shown none, arguing instead that debt relief on their part would violate eurozone rules that forbid the financing of government deficits.
Greek government officials also fear that the E.C.B. will do what it did in Cyprus in 2013 when it threatened to stop supporting the nearly bust Cypriot banks unless the government agreed to a bailout with Europe. This threat alone forced Cyprus into a bailout where banks were shut down, depositors were given so-called haircuts and strict capital controls were put in place.
From his very earliest days as finance minister, Mr. Varoufakis has said that he believes this so-called Cyprus solution has been the ultimate goal of his counterparts in Brussels and Berlin. Such an outcome would have dire political consequences and would likely lead to the fall of Greece’s left-leaning Syriza government.
“It would be very punitive,” said Stavros A. Zenios, a Cypriot economist who has written several papers on that country’s bailout. “And it would not solve anything, because in Cyprus we had a banking crisis, and in Greece it’s the sovereign that is the problem.”
Unlike central banks in the United States, Britain and Japan, the E.C.B.’s status as a lender of last resort is circumscribed and conditional, the result of strict European rules that outlaw money printing as a means to bail out broke governments. That means the central bank leadership in Frankfurt can quickly shift from a stance of propping up a banking system to allowing it to implode.
For the moment at least, analysts expect Mr. Draghi to remain supportive, as long as there is a chance of some broader deal being reached between Greece and its creditors before the end of June.
But tension between Greece and the European Central Bank could rapidly escalate over the huge credit line that is keeping the country’s banks afloat.
As the impasse with creditors has dragged on since the Syriza-led government came into power in January, Greeks have yanked about €35 billion from their banks. Bankers in Athens now estimate that total deposits stand at €126 billion, down from around €230 billion in 2009.
To replace that lost money, the Greek banks have had to borrow from a special E.C.B. credit line, known as emergency liquidity assistance, or E.L.A. The Greek central bank actually creates the euros that are lent under this facility, but the E.C.B.’s Governing Council has to approve its use.
While nearly $85 billion has been lent through the emergency credit line, Mr. Draghi has put limits on the support. On Friday, he approved close to €2 billion in additional funding, although bankers say that the Greek central bank had requested more.
The emergency credit line could become a flash point if Greece took steps to leave the euro and adopted a new currency.
Greece would in theory be on the hook for the billions of euros borrowed through the credit line, but it may not be able to pay them back — or want to. Most of the euros borrowed through the emergency credit line would most likely be out of the reach of the European Central Bank after having been transferred to other countries.
“It’d be very difficult to get those euros back,” said Guntram B. Wolff of Bruegel, a think tank in Brussels.
And if Greece did not pay back the amount, the E.C.B. and the national central banks of Europe would ultimately end up taking the financial hit. This could further inflame anger toward Greece among politicians in other countries who have criticized the Syriza government.
Still, the prospect of losing billions of dollars on the emergency credit line could make European leaders think twice about putting Greece in a position where it might have to default and leave the euro.
“The cost of Grexit may be higher than keeping Greece in,” Alberto Gallo, head of macro credit research at the Royal Bank of Scotland, said, using a term for a Greek exit from the euro. “It’s a lot of loss.”
source:nytimes.com
STUDIO 3 NEWCASTLE AUSTRALIA 