Thursday, 5 February 2015

ECB vs. Greece: a bumpier journey but no change in the final destination

Starting on the 12th of February 2015 the ECB will stop accepting Greek government bonds as collateral for liquidity provided to Greek banks. Does this mean that Grexit is nigh? No.

Greek banks will continue to have access to the ECB's Emergency Liquidity Assistance (ELA). To put things in perspective, Greek banks' have currently borrowed EUR 8bn (at most) from the ECB using government bonds as collateral. Including Pillar I and Pillar II bonds (government guaranteed bonds issued by Greek banks) an additional EUR 25bn has to be taken into consideration in our analysis. A total of EUR 33bn of ECB financing to Greek banks will thus be cut off.

Greek banks' deposits currently amount to approx. EUR 150bn. In June 2012, when the risk of a Grexit reached its peak, Greek banks had borrowed EUR 160bn from the ECB via ELA. Currently, they have borrowed EUR 5bn. There is everything but a shortage of available liquidity for Greek banks.

Should the ECB cut off the Greek banks access to ELA at some point, and a bank run ensue, capital controls would have to be imposed by the Greek government. But Grexit would still be far from inevitable. Grexit would only become a possibility in case no political agreement about debt-restructuring-in-exchange-for-structural-reforms was reached between the Greek government and the troika (especially the EU). This is extraordinarily unlikely (less than 1% probability in my view) as I explained in my last post Is Mr. Tsipras going to Hollywood?

Cutting a long story short, the ECB can make the journey bumpier for both the Greek economy and the Greek financial markets but the final destination will not change. Only politicians can change it.

They almost certainly won't.

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