28 June 2015

Financial Times: The ECB will defend the euro even if Greece quits

As expected the European Central Bank has decided to maintain unchanged the ceiling for the Emergency Lending Assistance to Greek banks, following the breakdown of the negotiations on the Greek adjustment program and Tsipras’ decision to call for a referendum to be held next Sunday.

The ECB had no alternatives. Increasing ELA to Greek banks would have breached the ECB’s rules of providing financing only to banks of countries that have agreed to an adjustment program. It would have raised the ECB’s exposure to the Greek central bank to unprecedented level, which would become worthless if Greece exited the euro and result in huge losses for European taxpayers.

Without additional financing, Greek banks will not be able to serve the rising demand for cash coming from Greek citizens standing in line, fearing that their savings will be severely devalued when converted into the new currency.

The coming week might prove dramatic for the Greek people, most of whom never wanted their government to put Greece’s euro membership in danger. Tsipras’s mandate after the January elections was to improve the terms of the adjustment program, not to quit the monetary union. They may ultimately recognize that they were better off one year ago, when the economy was starting to pick up and Greece had regained access to the capital markets. This may push them to vote in favor of the adjustment program proposed by the Eurogroup, and refused by the Greek government, but the uncertainty about the outcome will push people to try to protect their remained savings in euro.

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The ECB’s press release sent clear messages to financial markets and European political authorities. The first message reaffirms the ECB’s determination to use all the available instruments – which implicitly means QE and OMT – to ensure the ECB’s mandate. [...] Containing turbulence in financial markets over the coming weeks and months is thus fully consistent with fighting deflation and thus with the ECB’s mandate.

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The second, more subtle message refers to “the commitment by ministers from euro area member states to take all the necessary measures to further improve the resilience of euro area economies and to stand ready to take decisive steps to strengthen Economic and Monetary Union”.

Full article on Financial Times (subscription required)

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