ATHENS — As Greece’s standoff with its creditors enters the final stretch, the European Central Bank finds itself in the awkward position of being both the country’s savior and its scold.
Europe’s
central bank has been the lender of last resort for Greece, keeping its
banking system — if not the country itself — from collapse. But the
E.C.B. has also been among the most recalcitrant of its creditors,
pushing Greece to the verge of default by refusing to offer relief on
its heavy debts.
This tension in many ways mirrors Europe’s broader dilemma of how to handle Greece.
Should
lending lines to the country be renewed, in the interest of keeping the
eurozone intact? Or should Greece, having demanded too much from
Europe, not be bailed out again?
On
Monday, this will be the chief topic of discussion when eurozone heads
of state gather in Brussels for an emergency summit meeting. Greece
delivered a new set of proposals for a bailout deal to the top European
leaders over the weekend.
But time is running out.
Frantic
depositors pulled over a billion euros a day from the country’s banks
late last week, leading the E.C.B. on Friday to bolster the banking
system for the second time in three days. Greek bankers say that the
banks will soon have to close if this uncertainty continues.
Greece
is just about broke and must pay $1.8 billion to the International
Monetary Fund by June 30. So far, it has refused European demands that
it cut spending and amend its labor laws in return for a release of
frozen funds.
The central bank’s exposure to Greece now stands at 150 billion euros, or $170 billion, according to Deutsche Bank.
Of that, €122 billion is propping up the banking sector through an
emergency lifeline and other funding, and €27 billion is longer-term
Greek bonds.
At
83 percent of the gross domestic product of Greece, the bet is
substantial. It is larger than the lifelines doled out to other
bailed-out countries like Cyprus and Ireland, relative to the size of
their economies, and it underscores the lengths to which Europe has gone
to keep Greece afloat.
“The E.C.B. is playing a critical role,” said Mark Wall, the chief economist at Deutsche Bank
in London. “It is the primary financier of the Greek banking system —
which is the pressure point for Greece as a whole. Without the E.C.B.,
there is nothing to avert a collapse of the Greek banks.”
But
in the eyes of the nearly bankrupt Greek government, the E.C.B. has
been less the firefighter putting out a blaze than the executioner ready
to deliver a final ax blow.
That
is a result of the hard line taken by the central bank over the Greek
government bonds it bought five years ago. They were not included in the
2012 restructuring for private-sector bondholders, meaning the Greek
government is still making full payment on the debt.
To
keep from defaulting on these bonds, Greece must pay €6.7 billion to
the E.C.B. by the end of August, starting with a €3.5 billion
installment on July 20. One of the core areas of disagreement between
Greece and its creditors is over these obligations.
The Greek finance minister, Yanis Varoufakis, has on several occasions asked the president of the European Central Bank, Mario Draghi, to grant Greece relief on these debts.
Other
European countries and the I.M.F. have shown some flexibility in terms
of Greece’s debt obligations. The E.C.B. and Mr. Draghi have shown none,
arguing instead that debt relief on their part would violate eurozone rules that forbid the financing of government deficits.
Greek
government officials also fear that the E.C.B. will do what it did in
Cyprus in 2013 when it threatened to stop supporting the nearly
collapsed Cypriot banks unless the government agreed to a bailout with
Europe. This threat alone forced Cyprus into a bailout where banks were
shut down, depositors were given so-called haircuts and strict capital
controls were put in place.
From
his earliest days as finance minister, Mr. Varoufakis has said that he
believes this so-called Cyprus solution has been the ultimate goal of
his counterparts in Brussels and Berlin. Such an outcome would have dire
political consequences and would probably lead to the fall of Greece’s
left-leaning Syriza government.
“It
would be very punitive,” said Stavros A. Zenios, a Cypriot economist
who has written several papers on that country’s bailout. “And it would
not solve anything, because in Cyprus we had a banking crisis, and in
Greece it’s the sovereign that is the problem.”
Unlike
central banks in the United States, Britain and Japan, the E.C.B.’s
status as a lender of last resort is circumscribed and conditional, the
result of strict European rules that outlaw money printing as a means to
bail out broke governments. That means the central bank leadership in
Frankfurt can quickly shift from a stance of propping up a banking
system to allowing it to implode.
For
the moment, at least, analysts expect Mr. Draghi to remain supportive,
as long as there is a chance of some broader deal being reached between
Greece and its creditors before the end of June.
But
tension between Greece and the European Central Bank could rapidly
escalate over the huge credit line that is keeping the country’s banks
afloat.
Photo
As
the impasse with creditors has dragged on since the Syriza-led
government came into power in January, Greeks have pulled about €35
billion from their banks. Bankers in Athens now estimate that total
deposits stand at €126 billion, down from around €230 billion in 2009.
To
replace that lost money, the Greek banks have had to borrow from a
special E.C.B. credit line, known as emergency liquidity assistance, or
E.L.A. The Greek central bank actually creates the euros that are lent
under this facility, but the E.C.B.’s Governing Council has to approve
its use.
While
nearly $85 billion has been lent through the emergency credit line, Mr.
Draghi has put limits on the support. On Friday, he approved close to
€2 billion in additional funding, although bankers say that the Greek
central bank had requested more.
The emergency credit line could become a flash point if Greece took steps to leave the euro and adopted a new currency.
Greece
would in theory be on the hook for the billions of euros borrowed
through the credit line, but it may not be able to pay them back — or
want to. Most of the euros borrowed through the emergency credit line
would most likely be out of the reach of the European Central Bank after
having been transferred to other countries.
“It’d be very difficult to get those euros back,” said Guntram B. Wolff of Bruegel, a think tank in Brussels.
And
if Greece did not pay back the amount, the E.C.B. and the national
central banks of Europe would ultimately end up taking the financial
hit. This could further inflame anger toward Greece among politicians in
other countries who have criticized the Syriza government.
Still,
the prospect of losing billions of dollars on the emergency credit line
could make European leaders think twice about putting Greece in a
position where it might have to default and leave the euro.
“The
cost of Grexit may be higher than keeping Greece in,” Alberto Gallo,
head of macro credit research at the Royal Bank of Scotland, said, using
a term for a Greek exit from the euro. “It’s a lot of loss.”
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