Daily Insight ECB restricts ELA to Greek banks
Group Economics Macro & Financial Markets Research
Nick Kounis +31 20 343 5616
7 July 2015 • • • •
ECB raises ELA haircuts for Greek banks –liquidity to evaporate within days Subdued market reaction after referendum underlines that Greece is not another Lehman Stepping down of Greek finance minister may help a deal, but is not a game changer Eurogroup seems open for talks, but on its terms – Greece would need to make concessions
ECB restricts ELA for Greek banks
Varoufexit may help a deal…
On Monday evening, the ECB’s Governing Council decided to
One of the mottos of the current Greek debt crisis should be:
restrict ELA for Greek banks. Although it left the limit for ELA
‘prepare to be surprised’. There was a new twist on Monday
unchanged, it increased the haircut on the collateral used to
morning, when Greek Finance Minister Yanis Varoufakis
access the liquidity, reflecting the referendum result and the
resigned. He said that the Eurogroup had problems with him
increased risk of Greek sovereign default. It is unclear exactly
and Prime Minister Tsipras felt it would be better for the
by how much the haircut was raised. Some Greek banking
prospects for a deal if he stepped down. He will be replaced by
officials were reported to have played it down, saying it was
Euclid Tsakalotos, previously Deputy Minister for International
only a modest change in the haircut. However, the Greek
Economic Relations and lead negotiator in Greece’s talks with
banks cannot afford any kind of restriction. The Greek
the institutions. Mr. Tsakalotos’ background is an economics
authorities have admitted that the banking sector continues to
professor.
face acute liquidity problems despite the deposit controls. Even on the previous ELA regime, the Greek banks were projected
…but not a game changer
to run seriously short of liquidity by Friday. So the haircut will
The new finance minister is seen as being less confrontational
bring that even closer.
than Mr. Varoufakis and his appointment is positive for a deal. However, it is not a game changer. The barriers to a deal
Investors not phased by Greek NO The Greek public overwhelming rejects creditor proposal, triggering a sharp rise in Greek default and euro exit risks. What happens next? A few years ago the smart money would
remain and the new finance minister will not take a different view to the PM. In addition, the ‘trust issue’ for the Eurogroup is also with PM Tsipras.
have been on an aggressive sell-off in financial markets and a major deterioration in investor sentiment. But this is not 2010-
Eurogroup and EU Summit Tuesday
2012. The reaction of financial markets on Monday was
Most Eurogroup finance ministers reacted with balanced
relatively subdued. European equities were generally down by
comments to the referendum result. They are willing to talk to
less than 2%, Bund yields edged down only modestly, while
Greece, but they also signalled that Greece would need to
peripheral government bond yields were up by 10-20bp. The
make the concessions. The Greek government is looking for
euro weakened, but did not slump.
upfront debt relief, but most eurozone finance ministers will only consider debt restructuring if Greece delivered the
Not a Lehman moment
measures in a programme. In addition, the starting point was
This is in line with our view that Greek crisis escalation and
not the old programme, which has expired, but Greece would
possible eventual euro exit does not represent Europe’s
need to apply for a new ESM programme.
Lehman moment. Exposures of the eurozone banking system to Greece are modest and relatively transparent. At the same time, we do not think other eurozone member states are in a similar situation to Greece and ready to follow in its footsteps. Finally, the ECB would react with force in the case that market tensions escalated. It could activate the OMT. To qualify for the OMT, member states need to be in an ESM programme. However, this includes a precautionary credit line, which has very limited conditions.
We will find out more about the prospects for any new deal at the European meetings on Tuesday. There is a Eurogroup (at 13:00 CET) followed by a Euro Summit (18:00).