On Monday we reported something history: as a result of the relentless increase in Greek ELA usage (which if there is no deal today is set to surge yet again as the Greek bank run returns with a vengeance) in addition to the €38 billion in other claims the ECB has on Greece, for the first time ever the amount of ECB claims (i.e., implicit funding) on the Greek banking system surpassed total Greek deposits.
We asked rhetorically why this is important, to which we answered "because if overnight the ECB says "no more", and pulls a Cyprus, forcing Greek banks to procure liquidity in other ways, those Greek "assets" which have collateral value only because the ECB is backstopping them (and which would fetch at most pennies on the dollar once all Greeks stop paying their interest expense on outstanding debt in a default situation), then suddenly the reality of a Greek bail-in which could amount to up to 100% of total Greek deposits, becomes all too real."
In other words, this is the biggest leverage the ECB has over Greece. It also is a prima facie example of monetary financing of a state by keeping its insolvent banking system "solvent" but only as long as the ECB maintains the ELA.
This is also the criticism Bundesbank's Jens Weidmann unleashed on the Eurosystem (read the ECB) when he said that Greek banks should not continue to buy the short-term debt of their government, which is then repoed back to the ECB in exchange for precious cash.
"The Eurosystem must not provide bridge financing to Greece even in anticipation of later disbursements," said Weidmann, who also sits on the European Central Bank's Governing Council, which approves such funding to Greece.
"When banks without access to the markets buy debt of a sovereign which is likewise locked out of the market, taking recourse to ELA raises serious monetary financing concerns," he said in a speech to be delivered at a conference in Frankfurt.
"This casts doubt on their financial solidity," Weidmann asserted. "The latter is especially undermined by Greek policy decisions that have sparked capital flight and large-scale cash withdrawals."
Some other headlines from MNI:
- WEIDMANN: GREECE HAS ERODED SUPPORT FOR TRANSFER OF SOVEREIGNTY
- WEDIMANN: GREEK GOV POLICIES HAVE SPARKED CAPITAL FLIGHT
- WEIDMANN: ELA RAISES SERIOUS CONCERNS IF BANKS LEND TO STATE
- WEIDMANN: PROLONGED ELA FOR GREECE CASTS DOUBT ON BANK SOLIDITY
Weidmann is not the first to demand that the ELA be halted: on Monday we reported that the finance ministers of Germany (naturally) and Ireland (surprisingly) had voiced a strong opinion against extending Greek ELA if there was no capital controls to make sure that the ECB isn't merely funding the Greek bank run... which it is.
So is anything changing? Well, earlier today the ECB did not increase the Greek ELA. This was the second day the ECB kept its ELA unchanged according to Reuters citing a source familiar with their talks said, having previously increased it steadily over many weeks.
So is this just the ECB turning the screws on Athens in hopes of scaring Tsirpas into a quick deal, who should know by now that without the ECB's backstop, Greek banks will fail overnight, or did Jens Weidmann just do the Greeks the biggest favor possible - after all the animosity between him and Draghi is no secret. If there is anything the former Goldman partner would love it is to spite the Bundesbank head even more. As such, is it possible that the ECB would continue funding Greece even after June 30? Even after Greece defaults to the ECB on July 19?
We will know the answer very soon although when central banks abdicate their primary objective and commit fully to playing puppetmaster in regional and global politics, everything is possible.
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