NOT HALTING. SHIFTING. THEN IT GOES BACK LATER.
Today was really not the best day for the ECB to signal this:
May 16 (Reuters) – The European Central Bank has stopped monetary policy operations with some Greek banks as they have not been successfully recapitalised, euro zone central bank sources said on Wednesday.
The flash of that Reuters story did spook markets. It seems to have been taken as a signal that the ECB was pausing all liquidity ops to some Greek banks.
It. Really. Is. Not.
This seems to be because not many get how ELA works.
What’s really happened:
It’s a silly dispute between the central bank and the EFSF about releasing EFSF bonds to some Greek banks as recapitalisation instruments. The bonds have been earmarked for release under the second bailout in a few tranches, and will eventually total €48bn.
Once they get the bonds, the banks can pledge them as collateral within normal ECB liquidity ops. ‘Monetary policy operations’ in the Reuters story above means things like the ECB’s MRO. Normal liquidity ops have certain thresholds for accepting collateral.
But there’s been a delay. A dumb, technical, one. As MNI quotes one official:
“Up until then, the EFSF had sided with the Greek Financial Stability Fund, which was delaying the recapitalization process because it disagreed with certain points of the assessment of Greek banks’ eligibility for the funds,” he explained.
That’s why the funding that some Greek banks could have got from pledging these bonds to the normal ECB, shifts to ELA conducted by the Greek central bank. The Reuters story itself made this clear:
With no access to ECB funds, the banks concerned must go to the Bank of Greece for emergency liquidity assistance (ELA).
ELA has fewer collateral requirements. It’s comparable to a fail-over mechanism in the way it works here. The sum of Greek central bank ELA increases only to the extent of the sum of liquidity Greek banks could otherwise have got from the ECB. It’s a pretty specific swap of liquidity, but in any case, the Greek banks on the receiving end get… liquidity.
Also, we should make it clear that not all the ECB normal liquidity being supplied to Greek banks has been put on pause. 1. There are more assets in their collateral pools that they can pledge to the ECB. Similarly, they have €65bn of collateral for use under ELA.
The really important point to end on is that as soon as the EFSF bonds are transferred over (hopefully Wednesday’s misconstrued mess will focus a few bureaucratic minds), these Greek banks can go back to pledging the EFSF collateral at normal ECB ops. The brief spell in ELA ends. Incidentally, these brief switches in and out of ELA have also taken place in Irish banks and in Dexia when collateral requirements shifted against banks a few times, only to shift back later. World didn’t end then.
We know there’s a much bigger issue with ELA use in Greek banks. It’s a very fragile situation. It depends on how Greek bank depositors react. But this has very little to do with that broader problem.
Heck of a day to fudge the two, though.
Update — and just to close:
*ECB EXPECTS GREEK BANK RECAPITALIZATION TO BE FINALIZED `SOON’
Our colleagues at FT Money Supply also have an excellent explainer up.
ELA coverage – FT Alphaville