As Greeks withdraw, Draghi sends more

Mario Draghi can’t play by the rules European Central Bank (ECB) used in the past. A threat to withhold lenders’ aid forced Ireland in 2010 and Cyprus in 2013 to agree to international bailouts.

This time, Greece’s appetite for brinkmanship left the ECB’s president dependent on Europe’s politicians to deliver ultimatums while policymakers have kept Greek banks afloat.

Through almost daily doses of liquidity, ECB support for those institutions gave Greece room to negotiate bailout with creditors until the eleventh hour without imposing capital controls, which has riled sticklers for rules on ECB’s governing council, but such pliancy is a price Draghi may have paid to keep the euro intact.

London economist Holger Schmieding said: “This was too much of a political decision for ECB. Ireland didn’t look like [it was] falling out of the euro and Cyprus was much more marginal. Sometimes you discover flexibility you weren’t aware of before.”

Emergency liquidity assistance (ELA) was a tool developed to allow authorities to tide over solvent lenders who couldn’t raise funding in markets nor had collateral for regular ECB tenders. It was never meant to save whole countries.

While Greece didn’t ask for an increase in assistance last week, according to a person familiar with the matter, it needed approval for a higher ELA limit four times the week before.

Using Greece’s central bank, ECB is replacing money withdrawn by depositors fearful government and its creditors can’t make a deal. This allowed lenders to rack up overdraft of €90-billion since February.

ELA cash lent against state-guaranteed bank bonds and government debt at its 2012 peak was almost 63% of Greece’s gross domestic product (GDP), more than the equivalent measure in Ireland or Cyprus. Now Draghi says total liquidity support to Greece is €118-billion, or 66% of GDP, the highest of any country in the euro.

ECB ordered Ireland to accept external aid or face an end to funding, and Cyprus suffered a similar fate, it has yet to agree on making an explicit threat to Greece. Instead, Draghi left government officials and other institutions to cajole Greek Prime Minister Alexis Tsipras to commit to completing the current bailout. Last week, Draghi described ECB as the “junior partner in this game”, to International Monetary Fund (IMF) chief Christine Lagarde in Brussels.

Irish economist Juliet Tennent said, “I don’t think ECB will be the ones to pull the trigger in this case as the stakes are much higher. They’ll keep supporting the banks as long as the political process is alive.”

Draghi’s willingness to give Tsipras negotiating room while cash drains from the banking system riles those who have had a tougher ride. Ireland’s finance minister, Michael Noonan, said Greece may not get ELA funding after Thursday if it doesn’t agree to a deal. The ECB can stop assistance, which is nominally at the risk of the domestic central bank, if it “considers that these operations interfere with the objectives and tasks of the eurosystem”.

While that would be enough to allow ECB to halt ELA for Greece if it ends up defaulting on loans due to the IMF at the end of June, such a situation would be lose-lose, says Irish economist Eoin Fahy, adding: “Whatever the ECB does, it will be seen as overtly political. Cutting off ELA will be seen as kicking Greece out of the euro area, extending ELA seen as keeping Greece in the euro area against their mandate. They might prefer Greece to stay in, but not at any cost.”

Athens has scant sympathy for ECB’s dilemma. Tsipras describes liquidity control from the Bank of Greece as “asphyxiation”. Greece has been lucky to escape ECB’s full ire, especially after Finance Minister Yanis Varoufakis said in February he was running a “bankrupt country”. He said they knew Greece’s situation was threatening the eurozone’s cohesion: “Now they have to play safely.” – © Bloomberg

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