European Central Bank tightens noose on banking system as creditor powers punish Greece
Greek 'No' vote sees lenders act in concert, warning of imminent bankruptcy unless Athens capitulates to fresh reform demands
The European Central Bank has tightened liquidity conditions for the Greek banking system following the landslide victory for the Leftist government in Sunday’s referendum.
The central bank continued its freeze on the emergency liquidity assistance (ELA) it provides the banking system at €89bn. But in a highly contentious move, opted to tighten the collateral rules it imposes on lenders to access the lifeline, intensifying the squeeze on the cash-starved banks, which are set to remain closed for another two days.
The ECB said the move was based on the deteriorating quality of the bank collateral, most of which is made up of Greek government bonds. “The Governing Council decided today to adjust the haircuts on collateral accepted by the Bank of Greece for ELA," it said.
The drastic action came as Germany issued a humiliating ultimatum to Greece, warning that the country would be cast adrift and left to go bankrupt unless it agreed to much deeper concessions than anything offered so far.
Sigmar Gabriel, the German vice-chancellor, said the landslide rejection of EU austerity demands in the Greek referendum changed nothing, demanding that the Left-wing Syriza government must accept further belt-tightening without any prospect of debt relief if it wishes to remain in the eurozone.
“The final bankruptcy now appears imminent,” he said. The Greek leaders have been told that they have a deadline of Tuesday afternoon to come up with far-reaching proposals.
The draconian terms followed Greek prime minister Alexis Tsipras' move to rally five political parties behind a national unity declaration.
It called for “substantive talks” on debt relief, an investment blitz to fight mass unemployment and an immediate shot of liquidity for the country’s banking system.
The show of unity marked the start of what increasingly looks like a national emergency government, though it may have come too late to prevent an implosion of the banking system and a rapid slide towards "Grexit" over coming days.
Syriza has been demanding a 30pc reduction in the debt, either in the form of a write-off or by stretching maturities into the middle of the century on ultra-low interest rates. These hopes have been dashed.
The European Central Bank did not specify the level of haircut it had now imposed on the banks. Analysts at Barclays estimate that should it be raised to around 60pc, this would "result in the reduction of the total spare eligible collateral to almost zero".
"The Governing Council is closely monitoring the situation in financial markets and the potential implications for the monetary policy stance and for the balance of risks to price stability in the euro area," the ECB said in a statement.
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Germany's Mr Gabriel said any debt relief for Greece is out of the question at this stage since it would cause a collapse of discipline across the eurozone, triggering copycat demands from other countries in distress. “It would blow up the euro,” he said.
Greece’s four big banks are effectively out of cash, though some ATMs are still allowing Greek savers to extract the maximum €60 (£42) a day. The Bank of Greece has further stockpiles of notes but will not be able to release them after the ECB action.
Marcel Fratzscher, head of Germany’s DIW institute, said Greece is spiralling into “economic catastrophe”, with a complete breakdown of the banking system and a slide into full depression. “I am expecting IOUs and a parallel currency,” he said.
Fitch Ratings said the non-performing loans of the banks reached 40pc in the first quarter of this year and have almost certainly risen further since then. This in turn makes it even harder for the ECB to justify further ELA liquidity even if debt talks resume, fuelling a vicious circle.
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Berlin and Brussels are now acting as if their aim is to punish Greece and force it out of monetary union, even though this would almost certainly precipitate a default on €340bn of liabilities to the eurozone.
Angela Merkel met with Francois Hollande in Paris tonight to discuss the implications of the no vote. The German Chancellor took a tougher line than her French counterpart, insisting that Greece has already been offered very "generous" conditions, but Sunday's referendum result meant that "the requirements for starting negotiations about a concrete ESM programme are not present at the moment".
Mr Hollande was more conciliatory, saying the "the door is open for discussions".
As expected, the government appointed Euclid Tsakalotos, the former chief debt negotiator, to take over as finance minister after the flamboyant Yanis Varoufakis was forced out to appease the creditor powers. Mr Varoufakis's final sin was to call his Eurogroup colleagues "terrorists".
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Mr Tsakalotos, an Oxford-educated economist, is less abrasive but he has never been a believer in the euro and comes from the "neo-Marxist" Left-wing of the Syriza movement. The switch may improve the atmosphere at Eurogroup meetings but does not alter the fundamental clash of interests.
Meanwhile, the European Commission challenged the legality of the referendum, though few could doubt that it was a visceral expression of national feeling. It warned that the vague promises of debt relief floated in 2012 are no longer on offer now that Greece has allowed its entire rescue programme to break down.
The Commission’s team of lawyers is scrambling to find a legal way to smooth Greece’s exit from the euro, knowing that Syriza’s strategy is to hang on to its legal rights as an EMU member even if it is forced to take emergency steps in the meantime to keeps its banks afloat.
The political mechanics of EMU mean that Greece is now trapped in an untenable debt structure even though most economists - of whatever stripe or colour - agree that it makes no sense.
The root problem is that the debt is no longer owed to banks, funds and private investors, who know that losses are part of normal business when mistakes are made. In Greece’s case, the money is owed to the taxpayers of other EMU states.
The two rescues of 2010 and 2012 - primarily designed to save the European financial system - roped in taxpayers from Germany, France, Spain, Italy and the rest of EMU to provide loans to a Greek state that was already bankrupt.
It has transformed a normal clash between creditors and debtors into a fratricidal dispute between European nations. The result of this toxic arrangement is the disaster unfolding before our eyes in Greece.