Greek Banking, Grexit and the ELA

by George Hatjoullis

The focus of attention is on Greek debt and the risk of default by the Greek government. The implicit view is that default will automatically result in a Greek exit from the eurozone. This is not obvious. Membership of the eurozone is controlled via the banking system and not outstanding government debt. If Greek banks have access to Euro liquidity then Greece is part of the eurozone. In the final analysis this means access to ECB liabilities.

Greek banks can access liquidity through normal monetary channels if they present appropriate collateral to the ECB. The Greek central bank is part of the eurosystem and provided it complies with ECB procedures this will continue, irrespective of what happens to Greek government debt. The ECB will not make a political decision to exclude the Greek central bank. It will act however, irrespective of politics, according to its own procedures. If the Greek banking system presents eligible collateral it will get funding from the ECB.

The Greek banking system can, in exceptional circumstances, access Euro liquidity from its own central bank through the emergency liquidity (ELA) assistance facility. Any losses or liabilities of the Greek central bank arising from the use of this facility are ultimately the responsibility of the Greek state. The ECB has the power to veto use of this facility but only if the Greek banks receiving ELA are insolvent or the ECB judges that “these operations interfere with the objectives and tasks of the Eurosystem” (http://bit.ly/1vo4vaI).

The recent stress tests have confirmed that Greek banks are ‘solvent’ and can withstand whatever stresses were deemed relevant. The loss of deposits is causing liquidity problems and not solvency issues. It is thus quite reasonable for the Greek central bank to provide Greek banks with ELA. The only question is by what criteria will the ECB judge that this ELA provision interferes with the objectives and tasks of the Eurosystem? It will also need to come to this conclusion by a two-thirds majority of the votes cast on the governing council.

There is no necessary reason that ELA to Greek banks will disrupt the Eurosystem. Even if the Greek government defaults, there is no necessary implication for the solvency of Greek banks or any necessary impact on the Eurosystem. Only a decision by two-thirds of the votes cast on the governing council can stop ELA to Greek banks and effect a de facto exit. Without this action, forcing Greece to leave is very difficult and far from an obvious path. Indeed the Treaty of Nice refers to eurozone membership as irrevocable so the legal process to exclude is unclear. The Syriza hand is stronger than it seems and only the ECB has the capacity to effectively exclude. To do so without good cause within its own procedures would be a political judgement and in itself a breach of its own protocols.

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