The people of Greece have spoken, but their utterance is a little Delphic. The landslide No vote is hardly an informed opinion on the specific creditor proposal the question formally asked about — the creditors in any case withdrew that proposal in a fit of pique about asking the people what it thought.
The popular will is best interpreted as taking a stand against bullying — in the debt negotiations, but especially in the referendum campaign — and as expressing firm support for the government.
But it is not the Greeks’ own interpretation of what they have said that matters, nor even other Eurozone ministers’. All now comes down to what the vote is taken to mean by a small group of people: the Governing Council of the European Central Bank.
Recall that the closure of Greece’s banks was caused by the ECB’s decision to do the opposite of what Walter Bagehot taught, which was that to stem a bank run, the central bank should lend against collateral that, but for the crisis, is solid. In Greece, fearful people have wanted cash, but the banks have little cash left.
The normal course of action would be for the banks to get cash from the central bank, pledging their investments as security for the loan. But after Athens declared a referendum, the ECB said no further such loans should (for now) be given.
What were they thinking? If Greece ends up leaving the euro, it will have been because of this. The overarching question about the Eurozone’s financial management, therefore, is not about the Greek referendum, but about how its central bank could refuse cash to all the major banks in one of its member states.
As Charles Wyplosz has explained in a recent column, this is “a political decision of historical importance ... By not keeping the Greek banking system afloat, the ECB is failing on a core responsibility.”
This is unjustifiable. The EU Treaty lays out explicitly what the ECB has to do, in collaboration with the national central banks. The primary task is, of course, price stability. This is hardly relevant here: Greece’s economy is so small even flushing its banks with liquidity will have no effect on the Eurozone price level — and if anything, crushing the banking system and forcing Grexit will be more destabilising.
But while Frankfurt’s central bankers rarely mention them, the ECB has a number of other explicit responsibilities, so long as they don’t come into conflict with stable prices. Two are particularly relevant — one specific, one general.
The specific task is to “promote the smooth operation of payment systems”. Ask the pensioners in line at Greek banks, or the importers finding their letters of credit turned down, how smoothly the payment system is working.
The general task is to “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union” as laid down in the treaty. One such economic policy is the “imperative to break the vicious circle between banks and sovereigns” — that is to say, to make sure that the functioning of banks does not depend on the solvency of the state (and vice versa).
And the stated objectives of the EU include “the sustainable development of Europe based on balanced economic growth and price stability ... full employment ... economic, social and territorial cohesion”.
On the face of it, sectioning off the Greek banking system and blocking Greek residents’ access to banking services flies in the face of the ECB’s legal mandate. There is a good case to make that the central bank’s starvation diet for Greek banks breaks the law.
To the extent the governing council has imposed that diet in an attempt to influence the outcome of negotiations between Athens and its creditors, this seems to fall foul of the European Court of Justice’s reservations when its advocate-general cleared the ECB’s “outright monetary transactions” (OMT) — the programme for buying the bonds of a member state in financing difficulties.
This is not, of course, what you will hear from those who support the cap on emergency funding for Greek banks. They will say that, on the contrary, the ECB’s legal mandate prohibited further financing. The argument for that is twofold; both parts are unfounded.
First, if Greek banks get more funding they may use it to prop up the Greek state by lending it on to the government. That would in effect constitute an illegal credit line to the government.
Leave alone that this has been standard practice for the ECB. It is in any case not a risk, for the ECB itself, in its supervisory capacity, has limited the amount of Greek government debt the banks are allowed to hold.
Second, it is said that to protect against losses, central bank loans must be “overcollateralised” — that is to say the face value of the security pledged must be larger than the loan. But by how much?
In the last published update to its accounts, the Bank of Greece held 156 billion euros of bank assets (largely mortgages and other loans) as security for emergency liquidity worth 77 billion euros — or less than half. That amounts to a “haircut” — the loss the lender could take and still come out whole — of 51 per cent.
Are loans to Greek households and business really worth that little? Maybe they are. But if so, why is the ECB in its capacity as regulator saying that the Greek banks — which have equity of 18 per cent of assets — are solvent?
As FT Alphaville’s Matthew Klein explains, this is nonsense. The ECB can’t have it both ways. If 18 per cent is safe enough to guard against losses, then the ECB should lend on the same basis — that is, up to 82 per cent of the face value of the pledged assets.
That would end the Greek bank run immediately. Alternatively, if 18 per cent (let alone 51!) is not enough, then the ECB should immediately declare the banks insolvent, and trigger the European-wide single resolution mechanism that would restructure the banks so they can access liquidity again.
We must draw the rather dramatic conclusion that the ECB is violating its mandate and making a bad economic situation worse. And note that this is a relatively generous assessment. Paul De Grauwe goes further, arguing that the Greek state, too, is in good enough shape for the ECB to buy Greek sovereign bonds through the OMT programme.
Whatever he meant with “whatever it takes”, now is a good time for Mario Draghi to make good on his promise not to let the euro unravel.
— Financial Times
