ECB Said to Reject Supervisory Move on Greek Banks

The European Central Bank rejected a proposal by its supervisory arm to prohibit Greek banks from increasing their holdings of short-term government debt, amid concern that such a move would endanger political negotiations.

The Single Supervisory Mechanism, the ECB’s new bank oversight body, wanted to cap Greek banks’ holdings of domestic treasury bills, a key financing source for the cash-strapped government, euro-area officials familiar with the discussions said. While supervisors are concerned about the default risk that the assets carry, the higher-ranking Governing Council sent back the proposal Wednesday. The officials declined to be named as the matter isn’t public.

ECB President Mario Draghi is due to join four-way talks between Greece’s leadership, French President Francois Hollande and German Chancellor Angela Merkel starting in Brussels late Thursday. Draghi is faced with finding a balance between not deliberately worsening Greece’s financial plight as it struggles to stay in the euro, and not riding roughshod over the rules of his own institution.

The SSM, led by Daniele Nouy, has pushed Greece’s banks not to assent to government demands that they buy unlimited treasury bills. In February, the body readied a measure to force lenders to sell assets should a previous round of talks fail. SSM officials are reassessing the measures they can take to protect the banking system, the people said.

Greece’s Banks

An ECB spokeswoman declined to comment on the matter. On Wednesday, the ECB Governing Council approved a small increase in the amount of emergency liquidity assistance that Greece’s central bank can offer.

While the Greek government, shut out of international capital markets, has relied on its domestic banks to buy and roll over treasury bills, it is constrained by rules set by its creditors limiting issuance of such debt to 15 billion euros ($16 billion).

An ECB ruling strictly limiting what the banks can buy would have forced the government to raid social security funds to cover T-bill auctions, instead of using those funds to pay its bills as it currently plans.

“Greece can utilize other internal sources of funding more efficiently without breaching the 15-billion-euro T-bill ceiling,” Dimitris Drakopoulos, euro-area economist at Nomura International Plc in London, said in an e-mail. “This potentially buys more time.”

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