Greek Banks Win More Emergency Cash as Talks Loom

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Greek Finance Minister Yanis Varoufakis
Greek Finance Minister Yanis Varoufakis told reporters late on Tuesday that the country and its creditors are narrowing their differences, though the Latvian meeting is probably too soon to seal an agreement. Photographer: Andrew Harrer/Bloomberg

The European Central Bank almost doubled an increase in emergency funding to Greek banks from last week before political talks shift to Brussels and Latvia over the country’s bailout review.

The European Central Bank’s Governing Council raised the cap on Emergency Liquidity Assistance by about 1.5 billion euros ($1.6 billion) to 75.5 billion euros on Wednesday, people familiar with the decision said. ELA is funding provided by national central banks at their own risk and is extended against lower-quality collateral than the ECB accepts.

“The ceiling increase shows that deposit outflows from Greek lenders continue,” said Andreas Koutras, an analyst at In Touch Capital Markets Ltd. in London. “The question now is when will the collateral against ELA be exhausted -- in other words how much time is left?”

Euro-area finance ministers will meet in Riga, Latvia, on Friday in their latest attempt to persuade Greece to commit to economic reforms so that aid payments can be released before the country runs out of money. Greek Prime Minister Alexis Tsipras and German Chancellor Angela Merkel are due to meet on the sidelines of a European Union immigration summit in Brussels on Thursday, according to a Greek government official.

Greek stocks and bonds rose Wednesday after Finance Minister Yanis Varoufakis saw a “convergence” of views and ECB Executive Board member Benoit Coeure said progress was being made.

‘Tangible Progress’

“In recent days, there has been tangible progress in the quality of the discussions,” Coeure said in an interview with the Athens-based newspaper Kathimerini. “Significant differences on substance remain.”

There are signs Greece’s creditors are curbing demands for far-reaching reforms as part of current talks, focusing on a number of key actions instead, Medley Global Advisors said in a client report on Wednesday. The softening stance comes on condition Greece stays co-operative on fiscal targets, according to Medley.

The Athens Stock Exchange General Index rose about 2 percent at the close on Wednesday, led higher by a 13 percent jump in the FTSE/Athex Banks Index. Greek bonds also rose, pushing the three-year yield down 196 basis points, or 1.96 percentage point, to 27.62 percent.

Merkel Insistence

Merkel signaled on Wednesday that she won’t back off on Germany’s insistence on “reforms in combination with solid finances” in the euro area. Germany “will continue to call for this course of action, even though we sometimes face considerable pressure internationally,” she said at an event in Berlin, without mentioning Greece.

Earlier this week, Tsipras ordered local governments to move their funds to the central bank. The move will help him meet end-of-month salary and pension payments, though it will also further drain commercial banks of their deposits.

“If it can’t go on like this, it won’t,” said Holger Schmieding, chief economist at Berenberg Bank in London, who sees a 30 percent chance Greece will default and exit the euro. Tsipras should “make the right choice -– and better do it fast,” he said.

Greek lenders have a buffer of 2.9 billion euros in cash after the increase in ELA, one of the people said. Weekly ELA injections are intended to match deposit outflows, and liquidity buffers are kept at about 3 billion euros to give the Bank of Greece and the ECB time to react in an emergency. An ECB spokesman declined to comment.

Collateral Rules

Euro-area finance ministry officials expressed doubts during a Wednesday call about whether Greece’s incremental progress would be enough to unlock emergency loans, according to two people familiar with the matter. Greece’s refusal to privatize state assets, change its pension system and deregulate the labor market were the main stumbling blocs, one of the people said.

The persons asked not to be identified because the content of Euro Working Group discussions isn’t public.

The ECB is studying measures to rein in ELA funding to reduce the risks should political talks falter, according to people with knowledge of the matter. Staff have proposed increasing the discounts imposed on the securities banks post as collateral when borrowing from the Bank of Greece. Adjustments to the so-called haircuts haven’t yet been formally discussed by the Governing Council.

Varoufakis told reporters late on Tuesday that the Latvian meeting is probably too soon to seal an agreement. The best chance for success is an accord that leaves all parties somewhat unsatisfied, as a failure would be “catastrophic,” he said in Athens.

The anti-austerity coalition government has repeatedly expressed confidence that a deal to unlock bailout payments was imminent, only to be refuted by euro-area officials seeking concrete steps.

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