Tuesday, May 22, 2012

Greek ELA growth poses increasing risks for the Eurosystem

As discussed before, the longer it takes for Greece to exit, the more painful it will be for the remainder of the Eurosystem. The latest estimates by Barclays Capital now show intra-Eurosystem liability of €125.5bn (note this is only the central bank liability - does not include EU/IMF loans to Greece, etc.). What's more, this amount is continuing to grow as Bank of Greece (BoG) lends to the banking system via the emergency liquidity assistance (ELA).

The program however was meant to be used in rare cases, not on a mass scale it has been deployed in Greece. Here is what the ECB had to say about the ELA program.
The ECB: - One of the specific tools available to central banks in a crisis situation is the provision of emergency liquidity assistance (ELA) to individual banks. Generally, this tool consists of the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets. This support may be warranted to ease an institution's liquidity strains, as well as to prevent any potential systemic effects, or specific implications such as disruption of the smooth functioning of payment and settlement systems. However, the importance of ELA should not be overemphasised. Central bank support should not be seen as a primary means of ensuring financial stability, since it bears the risk of moral hazard. Furthermore, ELA rarely needs to be provided, and is thus less significant than other elements of the financial safety net, which have increased in importance in the management of crises.
But ELA has now become the primary form of funding provided by BoG to the banking system.

Source: Barclays Capital

The ECB is not openly discussing this, but these ELA euros are coming from TARGET2, further raising GoB's liability to the rest of the Eurosystem. Furthermore the collateral requirements for ELA are far less stringent than the ECB's standard financing facilities such as MRO and LTRO. In case of a possible re-denomination, the ability to recover ELA collateral with any material value will be quite minimal.

And in the mean time more requests for ELA funding are coming in:
Reuters: - Credit Agricole has renewed a request for the Greek Central Bank to grant its Emporiki unit access to a liquidity facility which has been made available to some other local banks, the French bank's chief executive said on Tuesday.

Jean-Paul Chifflet said the request was part of a wider range of measures aimed at reducing its potential exposure to Greece, including 1.6 billion euros ($2.04 billion) in European Central Bank financing for Emporiki.

"Finally, we have seriously reiterated our request to take advantage of a direct financing line from the Greek Central Bank, via the ELA (emergency liquidity assistance), the public tool of access to banking liquidity," Chifflet said in prepared remarks at the bank's annual shareholder meeting.

Credit Agricole has suffered some 6 billion euros in estimated losses related to Emporiki since it acquired the Greek bank in 2006.

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