Will The ECB Cut Greece's Access to Emergency Liquidity?

Like a record stuck on play, the Greek debt negotiations continue to drag on, with no resolution in sight. However, the time for a deal is now, as the capital outflows from Greek banks moves from a jog to a run.

In recent days, as the obvious lack of a debt deal continues, Greek citizens have sought to clear their bank accounts of deposits. In fact, according to data provided by the Bank of Greece, private deposits have declined an astonishing €23bn or 18%, from November through till March, 2015. It has been rumoured that the net outflow of capital has currently reached approximately €380m/day and shows no signs of abating.

Obviously, capital outflows of this nature would strip the Greek financial institutions dry, except for the ease of accessing the Emergency Liquidity Assistance program (ELA) offered by the ECB. However, there are concerns that the €80bn ELA limit may be reached shortly and then it becomes a political question of whether an increase is acceptable or not.

The scenario for the ECB refusing to raise the ELA might not be as implausible as it first sounds. Considering the log-jam at the recent round of debt negotiations, it is not unthinkable that the EU may wish to play hard ball and force Greece to either exit the Eurozone or bend to the will of their creditors. It remains the EU’s ultimate trump card and it would be extremely easy for the ECB to play, bringing the whole debt debacle to a head.

In fact, it would be relatively easy, as the ELA was intended to only support solvent banks with a temporary liquidity issue. Subsequently, the argument could be made by the ECB, at any stage, that they no longer see solvency within the Greek banks. So the decision, although not taken lightly, would immediately close the ELA and force the banks to the wall. Obviously, this would leave the Greek government with a tough decision, start printing drachmas, or agree to all EU creditor demands and remain in the Eurozone.

Looking at the experience in Cyprus, the ECB did publicly threaten to pull the ELA funding for Cyprian banks. This caused a large guffaw at the time and lent pressure to an international bail-out and subsequent “bail-in” arrangement. However, the Greek financial institutions are significantly more intertwined with their European partners as compared to Cyprus, at the time.

There are also some external factors affecting the playing of this “trump” card as both China and Russia look to setup alternative financial systems as they seek to challenge the hegemony of the US Dollar. Subsequently, a sudden Greek exit could come with the unintended consequence of increased Chinese or Russian influence within the European state. This is likely to rub salt into the EU’s wounds in a time of increased posturing between NATO and Russia.

Ultimately, the ECB holds the current means to break the deadlock but is likely wishing they will not have to use it. At the point where the ELA becomes politicised, all bets are off and the crisis could go either way.