ECB Puts Squeeze on Greece with Collateral Ban
07/20/2012| 12:25pm US/Eastern
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FRANKFURT--The European Central Bank Friday upped the pressure on Greece to regain support from its international official creditors, by restricting access to its precious liquidity facilities for much of Greece's banking sector.
The ECB said in a brief statement that it won't accept bonds issued or guaranteed by the Greek government "for the time being" as collateral in its monetary policy operations, adding that banks would have to revert to "emergency lending assistance', or ELA, from the Greek central bank to meet their funding needs in the meantime.
The ECB's decision reflects the uncertain status of Greece's assistance package, and follows a series of reports indicating that Athens has yet again fallen behind with its promises to cut the budget deficit and reform the economy. All major ratings agencies rate Greece's debt deep into "junk" territory and close to default, and the ECB had only suspended its usual ban on accepting speculative-grade paper earlier this year on the understanding that its bail-out program would soon be back on track.
That is still not clear. The Greek government is now seeking bridge financing to ensure that it can repay 3.1 billion euros ($3.8 billion) in bonds currently held by the ECB which mature August 20.
Greece's coalition government agreed Wednesday on a basic outline of a plan regarding EUR11.5 billion of spending cuts to be implemented over the next two years, but have pushed back final decisions on belt-tightening measures, pending discussions with the "Troika" of international creditors--the ECB, euro zone and International Monetary Fund.
Troika representatives will return to Greece on Tuesday as part of their routine monitoring of the aid program, and the ECB said it will review its policy once the Troika's review is completed.
Greece's banks have been dependent on the ECB for funding for over two years now, and many are already short of acceptable collateral. Although they received EUR18 billion in bonds issued by the EFSF as part of a recapitalization exercise in April, this by no means covers their entire funding needs from the ECB, which ran to over EUR135 billion in June. Nearly EUR62 billion of that was ELA.
The ECB's Emergency Liquidity Assistance scheme is approved on a case-by-case basis by the ECB's governing council, and comes at a premium to the conventional monetary policy operations. The conventional operations are, in the ECB's parlance, open to all "solvent counterparties with adequate collateral."
Write to Margit Feher at margit.feher@dowjones.com and to Todd Buell at todd.buell@dowjones.com
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