The decision being to keep emergency liquidity to Greek banks going at its level last week. From the ECB’s Sunday statement:
The Governing Council of the European Central Bank today welcomed the commitment by ministers from euro area Member States to take all necessary measures to further improve the resilience of euro area economies and to stand ready to take decisive steps to strengthen Economic and Monetary Union.Following the decision by the Greek authorities to hold a referendum and the non-prolongation of the EU adjustment programme for Greece, the Governing Council declared it will work closely with the Bank of Greece to maintain financial stability.Given the current circumstances, the Governing Council decided to maintain the ceiling to the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on Friday (26 June 2015).The Governing Council stands ready to reconsider its decision.Mario Draghi, ECB President, said: “We continue to work closely with the Bank of Greece and we strongly endorse the commitment of Member States in pledging to take action to address the fragilities of euro area economies.”Yannis Stournaras, Governor of the Bank of Greece, said: “The Bank of Greece, as a member of the Eurosystem, will take all measures necessary to ensure financial stability for Greek citizens in these difficult circumstances.”The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area. The Governing Council is determined to use all the instruments available within its mandate.
1) ELA “at the level decided on Friday” would be about €85bn-€90bn. To use a technical term, that’s still a lot of money. However, it’s a pretty restrictive state of affairs, as per Karl Whelan.
The issue would be depositor funding that’s left the banking system over the weekend, and the creditworthiness of Greek government-guaranteed collateral, posted in return for ELA, over the next few days when that guarantor may be about to default on the IMF.
Which may be why references to measures by the Bank of Greece to ensure financial stability start cropping up in the statement. More on that shortly. In the meantime…
2) By the standards of what used to be the most secret liquidity in Europe, this is a wordy statement.
Compare with the handful of sentences Cyprus got two years ago, in a similar decision to cap an already-large ELA programme. (Similar, although the basis for the decision was different, as Cypriot banks were at the time already of highly dubious solvency.) There’s a diplomatic quote from Mario Draghi himself, no less.
3) Cyprus appeared to establish that it’s difficult for the ECB to approve any increases in ELA, when the sovereign which ultimately underwrites that ELA isn’t in a programme.
Greece’s current programme will legally end on June 30th. It’s anyone’s guess when, or if, a new one will land. The link between ELA and a programme however seems to us to be looser here. The ECB refers to making its decision “given the current circumstances”. This would appear to be ECB speak for “well, this is just a mess now, isn’t it?”.
4) “The Governing Council stands ready to reconsider its decision.” That’s a pretty important signal that the doors haven’t closed in the context of that complete mess since Friday, although reconsidering works both ways.
An actual manual on how the council thinks about ELA is here, incidentally.
5) That manual refers to a lot of the technical stuff relating to ELA — which banks in particular are receiving it, the rates they’re paying for it (it’s not cheap by the way), and the haircut imposed on their collateral. This is not in the statement.
With a cap on the overall ELA level, and the Greek government’s creditworthiness in a state of limbo, those haircuts may become important. Analysts at Barclays previously reverse-engineered what they thought overall haircuts were:
However, it’s tricky to assess considering likely changes in ELA use since then. The main thing is the ECB will probably continue monitoring haircuts like everything else.
That takes us to…
6) Measures to ensure financial stability for Greek citizens by the Bank of Greece. This is a portmanteau term for bank holidays, capital controls, what have you. The BoG can effectively authorise them via decree.
As this excellent Q&A by Alex Barker says, a capital controls regime could be pretty difficult to set up within days while keeping banks open, which is why a bank holiday might be considered first (at the cost of closing banks entirely — with predictably wrenching effects for liquidity in the wider economy).
When the ECB says that “it will work closely with the Bank of Greece to maintain financial stability,” that’s because any measures like these are hard to design without outside help.
7) And oh yes, the last paragraph: a helpful reminder by the ECB that it is standing by to convert any attempt to price contagion into other peripheral sovereign bonds, or eurozone funding markets, into a smoking wreck.
And so to Monday’s open.
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