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The ECB makes its point to Greece–and to the Eurozone

On Monday, Greece’s new finance minister Yanis Varoufakis outlined a plan under which the European Central Bank would have taken almost all the strain for relieving its debt burden.

On Wednesday, the ECB told Mr. Varoufakis where it could be filed, abruptly curtailing access to its lending facilities for Greece’s banks.

The Frankfurt-based central bank said it would revoke a waiver of its rules that had allowed banks to use bonds issued or guaranteed by the Greek government as collateral for its loans, (by the far the cheapest source of financing Greece’s banks have, given their inability to borrow from the markets).

Since Greece’s second bailout in 2012, the ECB had agreed to overlook the fact that Greek sovereign debt didn’t have an investment grade rating, because it had agreed to a program to overhaul its economy. Last night, with the new Syriza-led government loudly proclaiming it wouldn’t adhere to the program, the ECB stopped pretending Greece’s debt isn’t junk.

The move will have few immediate effects, other than to kill the nascent recovery in lending to the Greek economy.

After falling 26% over four years, loans to Greek businesses had started to pick up in 2H 2014.Source: ECB
Source: ECB

The banks will still get their money, but they will get it from an ad-hoc facility known as Emergency Lending Assistance. They will have to pay 1.5 percentage points more for it than they would for regular ECB money. More importantly, the Greek central bank needs to get renewed approval for ELA from the ECB governing council’s every two weeks. Catastrophe only comes if the ELA is stopped.

But the real important of the ECB’s action is in how it was done. For a start, as University College Dublin professor Karl Whelan says, it didn’t need to make a unilateral decision that “it is currently not possible to assume a successful conclusion of the program review.” The program was going to expire at the end of February anyway.

So why bother?

The move certainly raises the pressure on the Greek government via the banking system, which will now (Whelan says) be more vulnerable to runs by panicky depositors. (Greece’s banks currently rely on the ECB to fund 14% of their total balance sheet. Even though that’s down from over 30% in 2012, it’s clear that the banks won’t survive without ECB help.)

The Safety Net
The ECB safety net

But that may, perversely, actually play into Athens’ hands. We’ve argued before that Greece’s only real leverage with the creditors is the instability that would be caused by exiting the Eurozone and defaulting on its loans. The ECB’s move just puts the Greek government nearer to a position where it can use this lever.

Anyone who thinks that this is too conspiratorial should bear in mind that Varoufakis was tweeting over six months ago (h/t Frances Coppola) that a threat to go further and cut the ELA completely would be “non-credible”.

“He stands at the edge of the cliff, and the ECB says ‘Do what we want or we will push you over’, Coppola writes. “His response: ‘Go on then, push.'”

Coppola goes so far as to argue that ECB President Mario Draghi is too good a game theorist to go along with Syriza’s strategy unintentionally. She concludes that the real object of yesterday’s move is to focus minds elsewhere in the Eurogroup. Draghi, of course, has said that even his new quantitative easing program won’t work unless Germany and others do more to support demand in Eurozone, mainly by loosening their own fiscal stances.

It might be too much to say that the ECB was consciously trying to force the Eurozone into making concessions to settle the Greek issue. Draghi and his colleagues are shoulder-to-shoulder with German Chancellor Angela Merkel on the need for Greece to overhaul its dysfunctional economy, and will be horrified by the new government’s announcements that it will stop privatizations, rehire over 1,500 civil servants and raise the minimum wage back to a level above the current average wage.

But the ECB has had five years of being pushed around by the Eurogroup, repeatedly forced to do the heavy lifting to save the economy because it was the only Eurozone institution actually capable of acting as quickly as events demanded.

In essence, Varoufakis’ plan was an extension of that pattern, a calculation that his fellow finance ministers would find it easier to compromise the ECB’s independence still further rather than write off their own claims on Greece.

As such, it’s easy to see the ECB’s move as putting a marker down to stop what it sees as a dangerous plan gaining support ahead of an E.U. summit next week. That meeting, on the 12th, will be followed by a much more intense meeting of Eurozone finance ministers on the 16th.

As Silvia Merler at the Brussels-based think-tank Bruegel argues, “the pre-emptive move of the ECB protects formally the central bank’s independence, but it also forces the political game of next week, well beyond the limit of a central bank’s remit.”