Draghi Pressures Greece as He Keeps Liquidity Tight

Mario Draghi pressured Greece to make progress on its bailout commitments or face a cash crunch, insisting that the European Central Bank is providing the country with as much liquidity as it can within the rules.

The ECB has already lent 100 billion euros ($110 billion) to Greece’s banks, or 68 percent of the country’s gross domestic product, Draghi said at a press conference in Nicosia Thursday. Its Governing Council increased the available pool of Emergency Liquidity Assistance, which constitute the bulk of that lending, by 500 million euros to 68.8 billion euros, he added.

Greece’s cash-starved government has been at loggerheads with the euro area and International Monetary Fund since its Jan. 25 election over austerity measures and the implementation of economic overhauls in return for emergency loans.

As bailout disbursements have ceased, the Greek state covers its cash deficit by rolling over treasury bills, forcing the country’s banks to make a choice between participating in liquidity-draining auctions or letting their sovereign default.

Uncertainty over the outcome of the standoff has exacerbated the crunch, as savers withdrew some 20 billion euros, or about 12 percent of total deposits, from banks.

The ECB president signaled that Greece should strike a deal with euro-area partners to solve cash-flow problems.

Government Reaction

“The last thing one can say is that the ECB is not supporting Greece,” Draghi said. “To what extent are decisions dependent on what happens at the Eurogroup? To an enormous extent. If there is an agreement, our background changes completely, and we’d be in much better place to take favorable decisions for Greece.”

The ECB’s decision to maintain the Treasury bill ceiling and keep Greek banks from the ECB’s normal financing operations doesn’t create additional problems for the Greek financial system, a Greek government official said in an e-mail to reporters on Thursday, asking not to be identified in line with policy.

Finance Minister Yanis Varoufakis will on Monday present details of the government’s reform plans at a meeting of his euro-area counterparts in Brussels, in the hope this will add sufficient details to unlock funds for his government.

Failure to strike a deal would raise the risk of Greece being unable to meet its debt servicing costs in the next weeks. Greece must refinance or repay about 6.5 billion euros in debt and interest this month, including Treasury bill redemptions, and overcome a poor start on tax collection, after revenue in January missed its target by about 1 billion euros.

Emergency Funds

“Greece has already run out of money and lives with emergency compulsory borrowing from pension funds and from European agricultural support money in transit to farmers,” said Nicholas Economides, a professor at Stern School of Business, in New York. “Unless there are new loans from Europe or alternatively the ECB allows Greek banks to buy more Greek debt, Greece will default at the end of March” Economides said in an e-mail.

Draghi poured cold water on Greek lobbying for the government to be allowed to issue more short-term debt, and for Greek banks to be permitted to buy it.

“The ECB is a rules-based, not a political institution,” and can’t provide monetary financing to governments, either directly or indirectly, “when banks bring collateral in order to buy that debt,” he said.

Bank Solvency

According to Greece’s deputy prime minister, Yannis Dragasakis, the ECB’s stance didn’t take into account that the country has made an agreement with euro-area member states to extend emergency loan support for another four months. Greece’s “immediate problem is to raise the ceiling of T-Bill auctions, so as to meet certain obligations to the International Monetary Fund” Dragasakis said in an interview with ANT1 TV channel on Thursday.

The ECB’s priority is to preserve the solvency of Greece’s lenders, Draghi said. While those banks are solvent at present, “if there is in place a certain communication that creates volatility in the market, this destroys collateral and undermines the solvency of the Greek banking system,” he added.

Instead, Draghi said Greece must implement structural economic reforms, a pre-condition of the disbursement of about 7 billion euros of remaining bailout funds from the euro area. Once the ECB is able to make a positive assessment about the likelihood of a successful completion of Greece’s bailout review, it can also restore the waiver, lifted in February, that allows lenders to use Greek government securities as collateral in the ECB’s regular financing operation, he added.

Low Effectiveness

“If the structural conditions are not in place, there will be little incentive to use this credit,” Draghi said. “Their effectiveness is going to be lower and it will take longer to get to our objective of price stability.”

The director of the European Stability Mechanism, Klaus Regling said Greece’s liquidity situation is cause for concern, as the state of the country’s finances is deteriorating.

“The primary surplus that was thought to be secured is melting away. I fear that it could even become a deficit again” the head of the euro area’s crisis fighting fund said in an interview with Handelsblatt.

Yields on Greek three-year bonds rose 22 basis points to 14.24 percent on Thursday. Stocks rose, with the benchmark Athens Stock Exchange gaining 1 percent.

As the government tries to convince its euro-area creditors to disburse the next aid tranche, the clock is ticking, according to Economides.

“There are no other domestic funds available to the Greek government,” he said.

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