If there were any holding out hopes that the European Central Bank might help ease the financial pressure on Greece over the next few weeks, those notions were firmly laid to rest by the ECB president Mario Draghi.
Speaking at a press conference in Cyprus during which he provided additional details about the ECB’s quantitative easing plan, Draghi sent an indirect but clear message to the Greek government: get with a program.
The ECB’s bond purchase program will see the ECB and national central banks injecting cash into the Eurozone by purchasing 60 billion euros of government bonds per month until at least September 2016 in an effort to get Europe’s economy moving again and counter deflationary forces. The ECB’s target is for inflation to reach levels close to but below 2%.
However in the short term, the QE plan will mean little for Greece which will be unable to participate in the program at least until July when Greek bonds held by the ECB are due to mature. That is because the Greek bonds currently held by the ECB already exceed the limit set by the program. Even after the bonds are redeemed, given Greece’s low credit rating, the country would have to be covered by a financial assistance program to allow the ECB to waive its requirements and purchase Greek bonds.
In short it may be about to rain money in Europe, but Athens is holding an umbrella.
No extra short term borrowing
When asked, Draghi also made clear that the ECB would not increase the limit on T-Bill issuances for Greece.
Currently the country has reached the 15 billion euro ceiling on the issuance of such short term debt, while beginning this month and for the coming months a number of debt obligations are coming due leaving Greece facing a funding shortfall and the prospect of default.
The Greek Finance Minister Yanis Varoufakis had raised the possibility that raising the ceiling on short-term debt would allow the government to raise some of the cash needed through T-Bill issuances.
But Draghi put a definitive end to that line of thought by firmly stating that the Governing Council had decided that the short-term debt limit would not be raised. This is because the T-Bills would likely be purchased by Greek banks using funds borrowed through the Emergency Liquidity Assistance mechanism. That would put the ECB in a position where it would be indirectly funding the government through money creation which is prohibited by the bank’s charter.
"The ECB is a rule-based institution. It is not a political institution," Draghi said.
The decision means that Greece will have to find the roughly 1.6 billion euros due to the IMF in the coming month from other sources to avoid a credit event. While the Finance Minister has stated that the government has a plan B, the precise details are not clear at this stage.
Similarly Draghi also made clear that the ECB would not be accepting Greek bonds as collateral for central bank funds until Greece had completed the review of its financial assistance program – despite the current 4 month extension. Once again Draghi stressed that this was not a political decision but that the ECB could only waive the rule that it not accept junk rated bonds as collateral if there were strong indications that the country in question was on track for a successful review of its bailout program.
"The ECB is the first to wish to re-start the financing to the Greek economy provided the conditions are in place, and the conditions are that a process which suggests a successful completion of the review be put in place quickly. That is the condition and we will certainly welcome such a development," Draghi said.
Emergency Liquidity Assistance
Europe’s central banker confirmed that a decision had been taken to increase the limit on ELA borrowing for Greek banks by 500 million euros.
Draghi pointedly stated that the ECB had already lent Greece 100 billion euros, an amount which had doubled in the past two months and which amounts to 68% of the country's GDP – the highest in the Eurozone. He noted that, as such, the institution had done much to keep Greece afloat but that 'is also the central bank of other countries as well.'
The ECB chief did not rule out the limit being raised again but made clear that the deciding factor was the solvency of Greek banks. The financial institutions he said were currently solvent – especially following the efforts over the past to recapitalize the banks.
However in what appeared to be indirect criticism of the government, Draghi pointedly noted that bad ‘communication’ could lead to ‘increased volatility’ which negatively affects banks’ solvency. Thus Greek banks continued access to ELA mechanism would depend in part on the moves made by the government to stabilize the financial system and protect the integrity of the banking system.
In short Draghi's statments may be good news for the eurozone as a whole, but left few options for the government other than to pursue the successful completion of the bailout program in agreement with its lenders.
Photo credit: EPA/KATIA CHRISTODOULOU
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