It came shortly after the European Union approved a €7-billion bridge loan to Greece.Most economists had thought that the ECB would leave ELA unchanged, a move that would have put enormous pressure on the banks, to the point that one or two of them probably would have faced collapse as their deposit base vanishes.
Mr. Draghi also joined the International Monetary Fund in calling for debt relief for Greece, whose debt to gross domestic product ratio, at 180 per cent, is the highest in the Western world and set to go to a crushing 200 per cent.
“It’s uncontroversial that debt relief is necessary,” he said. “The issue is what’s the best form of debt relief. I think we should focus on this.”
Whether the relatively small amount of liquidity will allow the banks to reopen their doors was not immediately known. The banks have been closed for more than two weeks, with ATM withdrawals limited to €60 a day.
Even if the banks do reopen, the capital controls, including the tight limits on cash withdrawals and international money transfers, are likely to stay in place for some time.
The ECB’s move, which was requested by the Bank of Greece, comes as a rare bit of good news for a country that seemed on the verge of ejection from the euro zone only last weekend, when its creditors presented it with a take-it-or-leave-it bailout offer.
At the time, Germany’s finance minister, Wolfgang Schaeuble, was suggesting that Greece seek a temporary exit from the euro zone, a scenario that he still considers a valid option. But Mr. Draghi insisted that the ECB never thought that Greece was headed out the door even when all hope seemed lost last week.
“We always acted on the assumption that Greece will remain a member of the euro area,” he said. “There was never a question.” Greek prime minister Alexis Tsipras reluctantly endorsed the creditors’ offer, which will force Greece to accept another round of deep round of austerity and reform measures in exchange for the bailout.
The Greek parliament approved the measures in the early hours of Thursday morning in a vote that fractured Mr. Tsipras’s ruling Syriza party, which was elected in January on an anti-austerity platform, only to betray it this week.
Bumping up the ELA program instead of leaving it frozen signals that the ECB “at least symbolically rewarded [the] latest progress in the Greek crisis,” ING Financial Markets economist Carsten Brzeski said. It also signaled that Mr. Draghi is confident that Greece will be able to redeem a €3.5-billion bonds held by the ECB on July 5, when they come due.
“All my evidence leads me to say we will be repaid, as well as the IMF, “ he told journalists. Greece defaulted on a €1.6-billion payment debt payment to the IMF on June. 30, becoming the first developed country to do so in the IMF’s history.
If Greece were to default on the payment bond payment to the ECB, the ECB would likely declare Greece and its banks effectively bankrupt, meaning it would have to withdraw ELA from the banks, triggering their collapse and Greece’s certain exit from the euro zone.
The decision to boost loans to the Greek came on the same day that the European Union approved the €7-billion, three-month bridge loan to Greece.
The funds would come from the dormant European Financial Stability Facility (EFSF), the original bailout fund that has been replaced by the European Stability Mechanism (ESM).
The bridge loan, which is to be followed by a €5-billion instalment, taking the total amount to €13-billion, will allow Greece to make its debt payments to the ECB, IMF and other lenders until the full bailout agreed on Monday is in place. But the revival of the EFSF to prevent the Greek economy from collapsing this month has caused outrage in some countries, especially Britain.
That’s because the EFSF is a European Union-wide fund, meaning the nine non-euro zone countries in the EU would be exposed to Greek default risk. Britain has agreed to allow the fund to be used as long as Britain’s exposure would be guaranteed against losses.
That guarantee is likely to come from €3.6-billion in profits on Greek bonds held by the ECB. The ECB, as expected, left interest rates intact at record low levels on Thursday.
Mr. Draghi said that he expects “moderate growth” ahead as the euro zone recovery broadens, with inflation rates raising gradually towards the end of the year.
Inflation was running at 0.2 per cent in June, down from 0.3 per cent in May. The €60-billion a month quantitative easing program remains intact and is set to run until September, 2016.
theglobeandmail.com
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