Greek economy: 2014 is not 2012

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Aside from the fact that it became part of the awkward arrangement with the European Commission and the International Monetary Fund to oversee the programs of Greece, Ireland, Portugal and eventually Cyprus, the central bank held the ultimate leverage on countries across the eurozone, the provision of liquidity to the their banking systems.

The dependency on the ECB started with the financial crisis in 2008, when liquidity for banks dried up everywhere else and the Frankfurt-based lender stepped in with various discount windows. As the eurocrisis unfolded, different countries found themselves with weak banking systems for different reasons and their banks resorted to the Emergency Liquidity Assistance, the famous ELA.

Banks turn to ELA when they don’t meet the criteria of the standard financing operations of the ECB. ELA is provided by the national central bank and is regularly reviewed and thresholds approved by the ECB. ELA is effectively the lifeline for banking systems and that makes it the ultimate lever to ensure either compliance or control of developments.

It is this leverage that then ECB-governor Jean-Claude Trichet used to coerce Ireland into a programme that did not include burning Irish banks’ senior bondholders. In May 2011, he sent out a similar letter to Greek Prime Minister George Papandreou, advising that a strategy of debt restructuring would mean that Greek banks will not be able to use Greek government bonds as collateral to secure liquidity from the ECB. In March 2013, Cypriot President Nicos Anastasiades was given an even harsher ultimatum that the island’s two banks would lose access to ELA within a few days, effectively leaving the country without a banking system and out of the euro, if he did not agree to a bail-in.

The euro area’s central bank turned from the monetary authority with a price stability mandate into the most powerful conditionality enforcer, even more powerful and convincing than the fearsome IMF.

As Greece’s latest review drags on after a series of terrible tactical and awful strategic decisions by Samaras over the last six months, the issue of Greek banks and access to ECB liquidity is coming up again due to the bank’s position that without a program in place it will not accept Greek government bonds as collateral and local lenders will be forced to the more costly ELA.

Taking a closer look, though, much has changed for Greek banks and their relationship with the ECB since the peak of the crisis.

Greek banks entered the global financial crisis with eurosystem funding of 20.6 billion euros in October 2008, one month after the collapse of Lehman. The ECB dependency peaked in February 2012, with just over 157 billion. Of this, 107 billion was from the ELA, the emergency assistance that became available to them from August 2011, a month after the discussion about restructuring Greek debt on a 20 percent net present value basis began.

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