Greek banks are running out of ways to fund themselves. Since the country’s first crisis in May 2010, domestic banks have depended on two crucial crutches: the stickiness of their corporate and retail depositors, and the willingness of the European Central Bank to extend emergency funds. Over the last month or so, these have started to crumble.
The ECB has lent euro 93 billion to Greek banks via its weekly and three-monthly refinancing operations. The trouble is that much of this has been secured against shaky Greek government debt. The ECB’s policy is to mark the collateral it holds to market prices, and then apply a haircut. Because five-year Greek sovereign debt now trades at 37 per cent of par, a bank using those bonds as collateral may now only receive 30 per cent or less of the value of each bond it pledges. The response has been to put up more collateral. That’s now getting trickier: many banks are running out of eligible bonds.
Growing fears of a Greek sovereign default have also prompted renewed deposit flight. Companies and households withdrew 2.5 per cent of their deposits in May, though this slowed to 0.5 per cent in July, central bank figures show. Since the start of September, however, the outflows have picked up again, according to a senior Greek banker.
Greek lenders do have a plan B: so-called emergency liquidity assistance (ELA) from the Bank of Greece. Under this scheme, the national central bank lends against a much wider range of collateral — such as corporate loans — that the ECB does not accept. This is all done at the discretion of the ECB’s governing council. As long as it acquiesces, Greek banks can use ELA to stay afloat.
But, there’s a catch. The more the Bank of Greece funds lenders by accepting dubious collateral, the more the country ties a noose around its own neck. Any losses the central bank suffers would ultimately fall on the Greek state. Increasing the use of ELA should enable the ECB to reduce its exposure to Greece’s troubled banks. But, if the country needs a bigger bailout out as a result, that will be the euro zone’s problem.