The European Central Bank heaped pressure on Greece’s new government by restricting access to its direct liquidity lines, citing concerns about the country’s commitment to existing bailout pledges.
The Frankfurt-based institution, responsible for oversight of lenders and monetary policy in the 19-nation euro area, announced Feb. 4 that the junk-rated collateral offered by Greek banks in return for regular financing will no longer be accepted, leaving them dependent on emergency liquidity assistance for funding.
Here’s a list of frequently asked questions about ELA:
Q: What is ELA?
A: Emergency Liquidity Assistance, or ELA, is extended by a national central bank of the euro area, in this case the Bank of Greece, to solvent lenders “facing temporary liquidity problems, without such operation being part of the single monetary policy,” according to the ECB’s website.
Q: Who approves the provision of ELA funds?
A: Even though ELA is extended by a national central bank, it is still central bank money of the euro area and the ECB’s Governing Council can restrict “ELA operations if it considers that these operations interfere with the objectives and tasks” of the euro-area system of central banks, or Eurosystem. “Such decisions are taken by the Governing Council with a majority of two-thirds of the votes cast,” according to the ECB rulebook.
Q: Is ELA assistance free?
A: No, ELA liquidity carries an interest rate of 1.55 percent, versus 0.05 percent for regular ECB financing, the Bank of Greece Governor Yannis Stournaras said in November.
Q: Why did Greek banks have to seek ELA?
A: Since 2010, the ECB has accepted Greece’s junk-rated government debt and state-backed securities as collateral in its refinancing operations as long as the government complies with austerity measures and reform pledges in its international aid agreements.
The Governing Council decided Wednesday to end the waiver “based on the fact that it is currently not possible to assume a successful conclusion of the program review.”
Q: How much ELA will Greek banks get?
A: The Greek central bank will extend 50 billion euros ($57 billion) in ELA to the country’s lenders as a replacement for regular refinancing operations, and another 9.5 billion euros on top, according to a euro-area central bank official familiar with the decision.
According to the latest available data from the Bank of Greece, Greek lenders’ reliance on ECB liquidity rose to 56 billion euros at the end of December from 44.9 billion euros at the end of November. Since then, it has increased, and Greek banks asked for ELA precautionary access already in mid-January.
Most of the existing ECB financing will have to be converted into ELA because Greek banks have very few investment-grade assets to pledge as collateral for regular funding operations. Their main investment-grade assets are EFSF-bonds.
Q: Have we been here before?
A: This is not the first time Greek banks have used ELA. Like Cypriot banks, they had to use ELA at the peak of the euro-area debt crisis. They escaped the shackles of ELA after May 2014 and had no exposure until December. In May 2012, when Greek depositors withdrew their savings amid concern their cash would be re-denominated in drachmas, the ECB plugged the liquidity hole with 124 billion euros of ELA.
Q: Why did Greek lenders seek ELA again?
A: Uncertainty over Greece’s future in the euro area triggered deposit outflows totaling more than 15 billion euros since the beginning of December. Also, Greek banks lost access to financial markets. ELA is their only lifeline allowing them to replace lost liquidity.
Q: Is this the end?
A: Certainly not. Greek banks have been here before, and so have banks of other euro-area member states. ELA won’t affect everyday operations and depositors and clients won’t notice a difference in their transactions.
ELA is an expensive temporary solution, however, subject to bi-weekly review by the Governing Council of the ECB. It gives Greek banks support until the country and its creditors solve their financing issues and strike a deal. If uncertainty persists, and deposit outflows accelerate, the Governing Council may decide that the problem is not liquidity, but the solvency of lenders. And then ELA will stop.