The Greek Central Bank supports the Greek system with emergency liquidity estimated at almost 100 billion euros. These funds were approved in secret by the European Central Bank, without an official announcement or disclosure of conditions to access the funds, according to the Financial Times. The use of “Emergency Liquidity Assistance” (ELA) program to help banks in the weaker eurozone economies is one of the lesser known aspects of the debt crisis, according to British newspaper.
The program, of which ECB is reluctant to provide information, helped avoid a collapse of the financial system in Ireland, and now supports to a greater extent Greece, thus ensuring the European Central Bank, which controls the facility, a significant power in ruling the destinies of some countries. The Financial Times notes that the bank keeps secret data including information about the countries assisted or the timing of the loans. It was caught a bit off guard in April, when, in a weekly document, it presented an unexpected increase of 121 billion euros in the box called, innocent, “other claims of banks in the euro area”, the result of merging ELA funding in a single category.
It is the minimum amount paid by the program to central banks in the eurozone. Barclays analysts said that Greece now uses ELA funds amounting to 96 billion euros, Ireland uses 41 billion euros and Cyprus 4 billion euros. If the data are correct, the total amount exceeds 140 billion euro, more that 10% of loans to banks through standard monetary policy operations. Because of the risks of excess liquidity to create inflation, providing funding through ELA above the 500 million euros threshold must be approved by the BCE Governing Council, composed of 23 members. Facility use can be stopped if two thirds of them oppose an application from an eurozone country to access the funds.
Most importantly, the risks are largely borne by the national central bank, unlike the usual liquidity, but there could be a widespread impact if a country would leave the euro area. Theoretically, there is no limit on funds that can be borrowed through ELA and no information about safeguards that need to be provided by the banks for loans or the interest paid. Irish example also shows that temporary use of funds may be extended.
Last week, ECB council ruled out four banks in Greece from ordinary liquidity operations, forcing them to remain dependent on the emergency program. “Stopping access to ELA would be the way to push Greece out of the euro area – if EU would like to exclude it or Greece would like to leave the monetary union. I do not think the ECB will make that decision. I think the ECB will allow politicians to make the decision,” said Laurent Fransolet, analyst at Barclays.
However, the ambiguity related to how ECB will act offers central bank influence on politicians, writes the FT. A warning of the ECB in 2010 that it will block financial support, convinced Ireland to accept the foreign aid plan. Undoubtedly, the ECB council will try to mobilize in a similar way Greek politicians, writes British newspaper.
Reply