The European Central Bank's decision to cut support to Greek banks may force the Syriza-led government to default and exit rather than abandon its anti-austerity programme writes James Meadway
The European Central Bank’s decision to cut off one form of its assistance to Greek banks was a calculated, and political move.
In detail, the ECB is now refusing to accept Greek government bonds as collateral for its loans made to Greek banks. Greek government bonds, loans issued by the government, are below “investment grade” – that is, reckoned by the credit ratings agencies to be at substantial risk of default (going unpaid). The ECB’s rules require it to take collateral as insurance against loans made out to banks. This rule had been waived for Greece, allowing its banking system to continue functioning.
Banks normally make payments amongst themselves all the time, in the form of loans to each other: this is how the whole banking system ensures that every bank has enough money at hand to meet all its obligations at any point in time. The ECB, in turn, loans money to banks to support this, through the “Eurosystem”.
However, Greek banks are, to all intents and purposes, insolvent, with the IMF estimating that 40% of their loans, made to businesses and households mostly in Greece, are non-performing – that is, not being repaid. At the same time, have their own customers very keen to withdraw cash. They fear an imminent crisis (and, by withdrawing their deposits, are ironically hastening one). But put these two conditions – non-performing loans and huge withdrawals - together and it’s clear why Greek banks can’t survive without extra support on a day-to-day basis. No money is coming in just as more money has to be given out. So support has come in the form of cheap loans from the ECB through the Eurosystem.
Up until now, the ECB was supporting the Greek banking system by taking lower-quality loans (Greek government debt) as collateral against the loans it made. This was to prevent a banking collapse; the ECB is a “lender of last resort” for banks in the eurozone, meaning it has a duty to prevent their collapse.
The ECB claims it can no longer accept Greek government bonds from Greek banks as collateral because it is not sure that the Greek government will reach a “successful conclusion in its programme review”. That is, the ECB is refusing to take Greek bonds because it does not believe the Greek government will reach a deal with its creditors. This is a political decision by the ECB.
The result is that the Greek banking system has been nudged a little closer to total failure. It’s not there yet: the Emergency Liquidity Assistance line of credit is available, with the Bank of Greece (Greece’s own central bank) able to access extra funding for private Greek banks. But this is subject to fortnightly review by the ECB, who can, at their discretion, simply cut the funding.
The result is to massively increase the pressure on Greece’s government. If a run on Greece’s banks develop, and they cannot finance themselves, the banks will collapse, and with them, Greece’s economy. At that point, Greece will default on its debt and almost certainly exit the Eurozone – it would be crazy not to.
All this has taken place just as representatives of the Greek government are attempting to reach a deal on Greece’s debt with their counterparts across Europe. These governments are all elected. The ECB is not. No-one voted for Mario Draghi, its President. The Greek finance minister, Yanis Varoufakis, was elected. The German finance minister, whom Varoufakis was meeting today, was elected. But it’s the ECB that can try and steer the outcome of those negotiations. The Greek government was quite correct to call this “blackmail” by the European Central Bank.
This is democracy against the bankers. The horizon for a possible deal in Greece has been radically shortened, to the Greek government’s disadvantage. It’s impossible to know, if anybody, is bluffing: Paul Mason reports that the Syriza-led government will, if pushed, default and exit rather than abandon its anti-austerity programme. For the benefit of the Greek people, this may well be the best possible of a set of bad outcomes.
Radical economist James Meadway has been an important critic of austerity economics and at the forefront of efforts to promulgate an alternative. James is co-author of Crisis in the Eurozone (2012) and Marx for Today (2014).