ECB offers helping hand to Greek banks

Greek banks will once again be allowed to participate in ECB's regular refinancing operations

The European Central Bank (ECB) today offered cash-strapped Greek banks a helping hand, following recent advances Athens has made in implementing the economic reforms demanded by its creditors.

The ECB's governing council announced that Greek banks will once again be allowed to participate in its regular refinancing operations, from which they had been barred for more than a year while Athens grappled with its creditors over the terms of its bailout.

The move will take effect from June 29.

In a statement issued after a meeting in Frankfurt, the governing council said it "acknowledges the commitment of the Greek government" in adhering to the conditions of the country's rescue programme and that it expected "continued compliance".

Normally, in the ECB's refinancing operations, banks receive cash in the form of very low interest loans in return for "collateral" — high-quality assets, preferably sovereign bonds, placed at the central bank as guarantee.

But given the desperate state of Greece's finances, its sovereign bonds have been classified as "junk" for some years, and are not normally eligible to be used as collateral.

Initially, in May 2010, the ECB granted Greek banks a special waiver to get around this problem, allowing them to use Greek sovereign bonds as collateral, as long as Athens kept to the terms of its international bailout programme.

But when Greek Prime Minister Alexis Tsipras and his radical Syriza party stormed to power in January 2015, threatening to rescind on the terms of its international bailout, the ECB suspended that waiver the following month until the new government in Athens could thrash out a fresh deal with its creditors.

And since then, Greek banks have been kept afloat via the Emergency Liquidity Assistance, or ELA programme, which is much more expensive.

By the end of April 2016, Greek banks still had total outstanding debt of 67 billion euros ($76 billion) from the ELA facility.

While the other banks in the euro area can refinance themselves for free – since the ECB slashed its "refi" rate to zero in March 2016 – the ELA borrowing rates are much higher.

The additional cost burden for Greek banks since February 2015 is estimated at just over one billion euros.

With the decision to reintroduce the waiver for Greece from June 29, the ECB is effectively welcoming Greece back into the fold of fully-fledged eurozone borrowers and lowering the borrowing costs for Greek banks.