Is the ECB trying to push Greece out of the euro? We’re not so sure…

A story seems to have taken hold today that suggests the ECB may be indirectly trying to push Greece out of the euro by reducing its liquidity support to its banks which, the theory goes, would threaten a banking collapse and cause Greece to leave the euro in order to use its own central bank to support its banks. This seems par for the course with many of the headlines doing the round at the moment, but after some further inspection we're not certain that any decrease can really be seen as the ECB trying to force Greece out. 

The story started from an overnight report from Dutch daily Het Financieele Dagblad which claimed that, according to unnamed central bank sources, the ECB is winding down its lending to Greek banks due to concerns over their capital levels. According to the article the liquidity provision from the ECB to Greek banks has dropped by almost half since they last publicly recorded level of €73bn in January.

Now, the report could be accurate but there are some caveats here which need to be noted.

First, ECB lending to Greece was always going to fall post restructuring.

Most of the €73bn borrowing by Greek banks from the ECB uses Greek bonds as collateral, when these were written down by over half, the banks were always going to have much fewer assets to post as collateral. This problem has also been exacerbated by the fall in the value of the new Greek bonds, which would have ensured that they were subject to huge haircuts in value at the ECB’s liquidity operations.

So, the Greek banks would probably have always had to cut their borrowing from the ECB simple due to collateral constraints.

The slack will naturally be taken up by the ‘Emergency Liquidity Assistance’ ( ELA, provided by the Greek Central bank under less stringent capital requirements, see here for a full discussion) resulting in a decrease in the level of lending by the ECB directly to Greek banks. Some lending would have been maintained by the €35bn in guarantees which the EFSF provided to help insulate the ECB against additional risk. However, these fall far short of covering the entire €73bn borrowing by Greek banks from the ECB (against which they would have needed to post around €100bn in collateral due to the large haircuts which the ECB applies).

One of the motivations for the ECB's supposed reduction in lending is the slow progress in the bank recapitalisation. This could well be true, however, the fact is that without this new capital the banks will continue to be short of collateral to use at the ECB, meaning lending must take place under the ELA in the interim.

Lastly, the size of the balance sheets which Greek banks need to service would also have been reduced by the restructuring meaning they may need less liquidity than before.

In summary, a fairly large decrease in ECB lending to Greek banks would have been expected in the aftermath of the restructuring, even if it were just moved onto the ELA. It could in fact have been motivated by constraints on the banks themselves rather than the ECB.

Now, that’s not to say that the ECB is not annoyed by the lack of progress in the Greek bank recapitalisation but we all know that the correlation of these events does not mean causation. Things will be clearer when the full figures are released, but until then we’d be very wary of suggestions that the ECB is trying to force Greece out the euro, it’s not like the eurozone is short of dramatic headlines anyway.