Commodity Trade Mantra

ECB – European Central Bank is Getting Tougher on Greek Banks

ECB - European Central Bank is Getting Tougher on Greek Banks

ECB – European Central Bank is Getting Tougher on Greek Banks

The European Central Bank’s (ECB) treatment of Greeks shows no signs of improving. With the country quickly running out money again as existing loans dry up, the ECB is once again squeezing Greece’s banking system.

The ECB now wants to  impose further control for Greek banks looking to secure emergency loans. It makes you wonder if they’re interested in keeping Greece in the European Union at all.

The latest round of demands by the ECB is forcing Greek banks to reduce the value of the collateral they post at the Bank of Greece (the central bank) by up to 50%. Greek banks will have to provide sufficient collateral to get access to any new loans, which now stands at €74 billion euros.

Reducing the value of their assets won’t improve their ability to secure new loans.  Typically, banks have to use existing assets to secure loans. The ECB provides the Bank of Greece with liquidity through the Emergency Liquidity Assistance (ELA), and they in turn issue out loans to Greek banks.

The reason why this is a problem for banks is because deposits are moving out of the banking system. Nonperforming loans — loans that are close to defaulting — are rising again for the first time since 2012. That’s hurting the banks’ ability to come up with adequate assets to use as collateral. To make things worse, the ECB doesn’t take the assets of Greek banks at face value, because of the high risk they pose as borrowers.

In other words, Greek banks will find it harder to get access to the money they need to stay afloat.

The ECB wants to avoid repeating their mistake with Cyprus

The ECB is demanding this measure because of what Cyprus did when it was going through its own crisis. The Central Bank of Cyprus inflated the value of collateral to allow Cypriot banks to borrow more money, which the ECB didn’t approve of. Now, they are making sure that Greek banks don’t do the same thing, by requiring them to make massive cuts to the value of assets they post at the Bank of Greece.

The ECB knows that this will make it harder for Greece to reach an agreement with its creditors. And the likelihood of that happening increased on Monday when the Greek government decided to call in all public sector cash reserves.

This gave a clear sign to the market that the Eurogroup — the meeting of finance ministers in the Eurozone — won’t reach a deal with Greece over repaying creditors when they meet on Friday. Greece expects that calling in cash reserves will raise €2 billion euros, which would be enough to keep the nation from defaulting for a little longer. Experts say that if the ECB pulls the plug on the ELA, Greece will default immediately.

Russia is coming to Greece’s rescue

The ECB is forcing Greece to look elsewhere to secure its liquidity. That’s why the relationship between Greece and Russia is growing stronger, with Putin keen to provide that liquidity for them. Reports suggest that a Russia-Greece gas deal — potentially worth hundreds of millions of euros every year for Greece — will be signed in the next week if Greece allows Russian gas pipelines to go through their borders.

The ECB’s move to limit the amount of money Greek banks can access will only increase the chances of Greece falling further under Putin’s spell.

 

 

Courtesy: Mat Spasic for The Daily Reckoning

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