Mon, Jul 06, 2015 page15

• ECB readies post-vote regional support

  AFTER THE REFERENDUM: The bank’s Governing Council is to meet today to discuss liquidity support for Greek banks through bond purchases and other measures

  • Bloomberg
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  The European Central Bank (ECB) claims it can calm any regional market turmoil that follows Greece’s referendum yesterday. Saving the country’s banking system will be harder.

  With two asset-buying programs, international swap lines, backstops for eastern Europe and cash tenders in place, the ECB has a wide range of tools at hand should bond yields surge or money markets freeze after the vote. That is a possible outcome if voters reject the terms of a EU-led bailout.

  Yet even if the Greek people back the EU offer, the nation’s lenders, which have been shut and under capital controls for the past week, will not be able to reopen soon unless the ECB approves more liquidity. To do that, monetary-policy officials would have to take a leap of faith that the government will be able to strike a new deal.

  

  A man on Saturday holds up a poster that reads, “If Greece was a bank, she would already be saved,” at the entrance of a rally in Villejuif, in the southern suburbs of Paris, France, in support of Greeks who were scheduled to vote in a referendum yesterday.

  Photo: AFP

  “The linkages to the rest of the euro area are relatively small, though some of the more vulnerable countries may lie in Eastern Europe and to help there is definitely in the ECB’s remit,” said James Nixon, head European economist at Oxford Economics in London. “None of that helps Greece though. We’re in deep, deep water there.”

  The ECB’s Governing Council is due to discuss liquidity support for Greek banks today. ECB Vice President Vitor Constancio on Friday said that “the only thing that matters” is the chance of a deal between Greece and its creditors.

  In the meantime, officials have prepared for the worst. The ECB now has more instruments at its disposal to contain ripples that threaten the stability of other banks, as well as legal backing from the European Court of Justice to use them as it sees fit, and has said it is ready to do so.

  With no room left for interest-rate cuts, the central bank’s most obvious option is more bond purchases. That could be done via its current quantitative easing or the untested Outright Monetary Transactions programs.

  ECB executive board member Benoit Coeure said last week that the bank could develop “new instruments” to rein in market volatility, without saying what they might be.

  The central bank also maintains a “full allotment” policy in its liquidity operations, so any bank with adequate collateral can borrow as much as it needs. That is of little use to Greek banks though, as Greek debt is not rated highly enough to qualify.

  Policymakers are willing to reach beyond both the euro and the euro area. Swap lines between six of the world’s major central banks that were set up during the early years of the sovereign debt crisis were made permanent in 2013, meaning lenders can access dollars, pounds, yen, Swiss francs and Canadian dollars if needed.

  The ECB will provide Bulgaria with access to refinancing operations, offering euros to the banking system against eligible collateral, and is ready to assist other nations in eastern Europe, according to people familiar with the situation. That would help limit contagion in countries with a relatively high exposure to Greece. The ECB and the Bulgarian central bank declined to comment.

  “The ECB is by far the most flexible and powerful source of policy support in the event of major financial contagion,” Citigroup Inc analysts, including Guillaume Menuet and Antonio Montilla, said in a note. “We have little doubt that the ECB would intervene.”
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