The ECB has made some decisions regarding Greece that clearly
indicate it does not want to push Greece out of monetary union.
It has gone so far as to essentially allow the Bank of Greece to
fund the Greek government.
Consider the sequence of events. There was a 31.5 bln euro aid
tranche that was due in June that the Troika delayed
disbursement of pending commitments from the new government.
This included 25 bln euros to recapitalize Greek banks.
Without have the aid assured, the ECB seemed to have little
choice and last month decided to no longer accept Greek bonds
(or Greek government guaranteed bonds) as collateral for refi
operations. Facing a 3.2 bln euro bond redemption (held
incidentally by the ECB), Greece reportedly asked for a bridge
loan to cover until the aid tranche is paid. The ECB refused.
Greece sought to trigger a clause giving it a month grace period
for its payment. The ECB refused.
This could force Greece to issue its own currency. However, the
ECB threw Greece a life line of sorts. As we noted previously,
the ECB approved lifting the cap amount of Greek T-bills the
Bank of Greece can accept from Greek banks as collateral for
lending under the ELA (Emergency Liquidity Assistance).
This, in turn, will allow the Greek government to service its
near-term debt obligations by issuing T-bills, which its banks
will be the dominant buyers. The Greek banks will likely use
those bills as collateral for new borrowing under the ELA. The
ECB regulates the amount of ELA that a member central bank can
offer. In the middle of Q2, the ECB raised the Bank of Greece's
ELA cap to 100 bln euros. This gives the central bank scope to
lend another 30-35 bln euros. Some reports suggest that as early
as tomorrow the Greek government can announce an increase in its
T-bill offerings.
It is not clear how long the 100 bln euro ELA cap will have to
last Greece. Previously it was anticipated that the Troika would
reach a decision in time for the mid-Sept Eurogroup meeting.
This is looking increasingly unlikely. The latest press reports
indicate that nothing will be decided in September. Instead the
Troika will "occupy" Greece through September and its review of
Greece would be presented to the Eurogroup meeting scheduled for
Oct 8.
Follow the daisy chain: Greece issues T-bills to pay its
official creditors, who have thus far refused to make the
tranche payment that was due two months ago. Greek banks will
buy those T-bills and then use the same to get new funding from
the Greek central bank under the ELA that has been approved by
the ECB. It is not immediately clear how long this fudge can
last. If the ECB's ELA cap or the limit on the amount of T-bills
that it allows the Greek central bank to accept as collateral
from Greek banks is approached it seems reasonable to assume
that it (the ECB) will simply lift the ceiling and caps again.
This seems to reflect a reluctance on the part of the ECB
squeeze Greece to the point of forcing it out of the monetary
union. We, like many, are concerned that if Greece is forced
out, that it would increase rather than diminish the risk that
others are forced out as well. Moreover, given the imbalances,
unfathomable indirect impacts, and other unknowns, it may very
well be the case that it is cheaper to keep Greece on life
support than to pull the plug. Nor will a Greek exit make it any
easier to address the larger problems in Spain and Italy.