May 17 (Bloomberg) -- The European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk as President Mario Draghi signaled the ECB won’t compromise on key principles to keep Greece in the euro area.
The Frankfurt-based ECB said yesterday it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.
The move comes after Draghi acknowledged for the first time that Greece could leave the monetary union. While the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet,” he said in a speech in Frankfurt yesterday.
“A Greek exit was seen as an absurdity up to now,” said Thomas Costerg, an economist at Standard Chartered Bank in London. “It is gradually becoming the main scenario. The ECB is prioritizing its balance sheet over monetary-union geography.”
Greece faces a fresh election on June 17 that may boost parties opposed to the conditions of its international bailouts, raising the specter of its exit.
European stocks dropped for a fourth day today, to their lowest level this year, amid growing concern Greece will be forced to quit the euro. The Stoxx Europe 600 Index fell 0.4 percent to 243.52 as of 9:21 a.m. in London. The gauge has dropped about 3.3 percent this week. The euro was unchanged at $1.27, having dropped almost 4 percent this month.
A 130 billion-euro ($165 billion) bailout earlier this year provided a 50 billion-euro fund to recapitalize Greek banks after they reported losses from the country’s debt restructuring, the largest ever. Greece’s four biggest banks are waiting for European Union approval to receive 18 billion euros of bonds issued by the European Financial Stability Facility for their recapitalization, Imerisia reported yesterday, without saying how it got the information.
The ECB can only lend to sound banks and therefore won’t allow undercapitalized institutions to access its refinancing operations, a euro-area official said on condition of anonymity.
“Pending the recapitalization of Greek banks that are severely undercapitalized as a result of the” debt restructuring, some “have been moved to Emergency Liquidity Assistance,” said ECB said.
The so-called ELA is emergency support national central banks can provide to lenders with ECB approval. The ECB “continues to support Greek banks,” it said.
The ECB is conducting a comprehensive review of all its policy tools and has no immediate plans to increase stimulus even as market tensions mount, two euro-area officials said.
The review, mandated by the central bank’s six-member Executive Board, intends to assess the effectiveness of its measures, including the bond-buying program and long-term refinancing operations, and is scheduled to be completed in June or July, said the officials, who spoke on condition of anonymity because the deliberations are private.
A third official said the ECB may not consider taking any further policy action until July, and that the bank sees current market tensions as a way of focusing politicians’ minds on reform efforts. Bond yields in Spain and Italy have reached levels that last year pushed the ECB to restart its bond-purchase program.
A Greek exit could be “technically” managed yet would damage confidence in the monetary union, ECB council member Patrick Honohan said on May 12. A departure by Greece “is not necessarily fatal, but it is not attractive,” he said.
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