European Central Bank Squeezes Greek Banks, Tightening Access to Loans

As Greece scrambles to secure a financing deal with Europe before running out of cash, the European Central Bank is tightening the vise on the country’s ailing banks by curtailing access to desperately needed emergency loans.

The European Central Bank is now demanding that the value of the collateral that Greek banks post at their own central bank to secure these loans be reduced by as much as 50 percent, according to people who have been briefed on these discussions but who were not authorized to discuss them publicly.

And, these people say, if the Greek government and Europe remain at an impasse on an agreement about austerity measures, these so-called haircuts could increase further.

The move highlights the hard-line approach taken by the E.C.B. toward Greece as it presses the new government to reach an agreement with its creditors. With the value of the collateral being reduced so significantly, banks will be hard pressed to obtain the money they need to survive.

For more than three months, Greece’s largest banks have been forced to borrow short-term, higher-interest money from their central bank — a process called emergency liquidity assistance — because the E.C.B. deemed it too risky to extend credit to the banks itself.

The banks, in turn, have to provide adequate collateral to obtain these loans, which now stand at 74 billion euros, $79.7 billion, or more than half the amount of Greek domestic deposits.

But with deposits fleeing the banking system and with nonperforming loans — which had stabilized before the radical Syriza government came to power early this year — increasing again, it has been difficult for Greek banks to come up with acceptable assets to underpin borrowing.

Controversially, Greek banks have even begun to issue bonds to themselves and, after securing a government guarantee, have used the securities to secure short-term financing — a practice that was excoriated by Yanis Varoufakis before he became the Greek finance minister.

On April 8, for example, the National Bank of Greece self-issued €4.1 billion of six-month bonds that carried state backing. But with Greece on the verge of default — Mr. Varoufakis has frequently said his country is bankrupt — those guarantees are no longer worth much.

Mr. Varoufakis has often complained that the E.C.B. is “asphyxiating” Greece by limiting the amount of bills that the banks can buy from the government and keeping a tight leash on emergency loans.

At the same time, Mario Draghi, the president of the E.C.B., has made it clear that if Greece does not strike a deal with Europe he will eventually stop backing the Greek banks, which would inevitably lead to capital controls and eventual default.

Moreover, these haircuts exceed those imposed on Greek banks in June 2012, when emergency loans had soared to €125 billion on worries that Greece would be forced to leave the eurozone.

A spokesman at E.C.B. headquarters in Frankfurt declined to comment. Under E.C.B. rules, the central bank of Greece assumes full responsibility for the credit risk when it issues these emergency loans. But the E.C.B. carefully monitors them, setting limits and scrutinizing the collateral.

During the Cyprus crisis, Jens Weidmann, the powerful German member of the E.C.B.’s governing council, bluntly criticized the head of the Cyprus central bank for inflating the value of collateral to allow desperate Cypriot banks to borrow more money. By requiring such large discounts, the E.C.B. is making sure that the same thing does not happen in Greece.

nytimes.com