Monday 26 September 2016

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

Ambrose Evans-Pritchard, Athens & Mehreen Khan

Published 06/07/2015 | 22:07

Pensioners argue with bank staff as they wait outside a National Bank of Greece SA office to collect their pensions on Kotzia square in Athens, Greece, on Monday, July 6, 2015. European stocks dropped and the euro weakened as Greek voters' rejection of austerity sent investors to the relative safety of Treasuries, German bunds and the yen. Photographer: Chris Ratcliffe/Bloomberg
Pensioners argue with bank staff as they wait outside a National Bank of Greece SA office to collect their pensions on Kotzia square in Athens, Greece, on Monday, July 6, 2015. European stocks dropped and the euro weakened as Greek voters' rejection of austerity sent investors to the relative safety of Treasuries, German bunds and the yen. Photographer: Chris Ratcliffe/Bloomberg
A woman withdraws money from an ATM machine next to a beggar and a graffiti reading" No to fear" in Thessaloniki. Photo: Getty Images

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.

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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.

Greece's Prime Minister Alexis Tsipras leaves after a meeting with Greek political party leaders at the Presidential Palace in Athens
Greece's Prime Minister Alexis Tsipras leaves after a meeting with Greek political party leaders at the Presidential Palace in Athens

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.

Read more here: Merkel and Hollande urge Greece to offer quick proposals - ECB leaves level of emergency credit to Greece unchanged  

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.

French President Francois Hollande (L) welcomes German Chancellor Angela Merkel before talks and a dinner at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande (L) welcomes German Chancellor Angela Merkel before talks and a dinner at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande (L) welcomes German Chancellor Angela Merkel before talks and a dinner at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande (R) welcomes German Chancellor Angela Merkel before talks and a dinner at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande (L) waits for the arrival of German Chancellor Angela Merkel at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande (L) welcomes German Chancellor Angela Merkel before talks and a dinner at the Elysee Palace in Paris, France, July 6, 2015. Hollande and Merkel met in Paris on Monday evening following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum. REUTERS/Philippe Wojazer
French President Francois Hollande and German Chancellor Angela Merkel leave after a joint statement at the Elysee Palace in Paris, France, July 6, 2015 following the Greek people's resounding 'No' to a European cash-for-reform deal in a referendum in Greece. REUTERS/Philippe Wojazer

“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.

Read more here: Greece crisis: Taoiseach rules out debt write down for embattled Mediterranean country  

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.

Greek Finance Minister Yanis Varoufakis arrives to make a statement in Athens, Greece July 5, 2015. Greeks overwhelmingly rejected conditions of a rescue package from creditors on Sunday, throwing the future of the country's euro zone membership into further doubt and deepening a standoff with lenders
Greek Finance Minister Yanis Varoufakis arrives to make a statement in Athens, Greece July 5, 2015. Greeks overwhelmingly rejected conditions of a rescue package from creditors on Sunday, throwing the future of the country's euro zone membership into further doubt and deepening a standoff with lenders
Greek Finance Minister Yanis Varoufakis (3rd L) and head negotiator with Greece's lenders Euclid Tsakalotos (L) make their way past parliament as they head to Prime Minister Alexis Tsipras' office in Athens, Greece June 28, 2015. Greek banks and the stock exchange will be shut on Monday after creditors refused to extend the country's bailout and savers queued to withdraw cash, taking Athens' standoff with the European Union and the International Monetary Fund to a dangerous new level. REUTERS/Alkis Konstantinidis
Greek finance minister Yanis Varoufakis has announced his resignation (AP)

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.

A man looks at the newspapers at a newsstand in central Athens (AP Photo/Emilio Morenatti)
A man looks at the newspapers at a newsstand in central Athens (AP Photo/Emilio Morenatti)

Read more here: France tries to keep path open for Greece accord  

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.

"No" supporters wave Greek flags by the parliament in Athens, Greece July 5, 2015. REUTERS/Yannis Behrakis
A supporter of the No vote shouts slogans after the results of the referendum in the northern Greek port city of Thessaloniki, Sunday, July 5, 2015. (AP Photo/Giannis Papanikos)
A "No" supporter waves a Greek flag by the parliament in Athens, Greece July 5, 2015. REUTERS/Yannis Behrakis
A supporter of the No vote shouts slogans after the results of the referendum in the northern Greek port city of Thessaloniki, Sunday, July 5, 2015. (AP Photo/Giannis Papanikos)
A "No" supporter waves a Greek flag by the parliament in Athens, Greece July 5, 2015.REUTERS/Yannis Behrakis
Riot police detain masked youth during minor clashes in central Athens, Greece early July 6, 2015. REUTERS/Marko Djurica
Supporters of the No vote celebrate after the results of the referendum at Syntagma square in Athens, Sunday, July 5, 2015. (AP Photo/Emilio Morenatti)
Supporters of the ruling Syriza party celebrate their victory in a referendum by the parliament in Athens, Greece July 5, 2015. REUTERS/Dimitris Michalakis
"No" supporters wave Greek national flags on the main Constitution (Syntagma) square in Athens, Greece July 5, 2015. REUTERS/Yannis Behrakis
"No" supporters shout slogans and wave Greek national flags during celebrations in Athens, Greece July 5, 2015. REUTERS/Dimitris Michalakis

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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A "No" supporter waves an "Estelada" (Catalonian separatist flag) in Thessaloniki, Greece July 5, 2015. REUTERS/Alexandros Avramidis

Read more here; How the Greek papers have reacted to the resounding No vote  

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".

Read more here: Markets drop after Greek No vote  

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.

Read more here: Government stance on Greek debt relief appears to shift after referendum  

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.

Telegraph.co.uk

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