Tags: EU | European | Central | Bank | Greece

ECB Steps up Financial Pressure on Greece to Reach Deal

Wednesday, 04 February 2015 05:31 PM

The European Central Bank has added pressure on the Greek government by withdrawing a key borrowing option for the country's banks as it struggles to avoid defaulting on its debts and crashing out of the euro currency union.

The move underlines the key role the ECB, the monetary authority for the 19 countries that use the shared currency, is playing in the Greek drama.

The ECB on Wednesday said Greek banks could no longer access ECB credit by using Greek government bonds or bonds guaranteed by the government.

The ECB had allowed the use of Greece's junk-rated bonds as collateral because the government was getting a financial lifeline though a bailout program that expires Feb. 28. The ECB said in a statement that prospects for a new deal appear uncertain. Greek banks could use other securities as collateral, but government bonds and government-guaranteed bonds play a big role in their ability to get the money they need to stay afloat.

Greece's new government has rejected the austerity conditions attached to the bailout loans, saying cutbacks have devastated the economy. It is seeking a new agreement to avoid default and possible departure from the shared euro currency.

The ECB said Greek banks could access emergency loans provided by Greece's own central bank to replace the lost credit. Greek banks did just that while the country was going through a 2012 default. However, the replacement credit comes at higher interest rates and any default losses hit the Greek government directly.

Credit from the Greek government, called Emergency Liquidity Assistance, or ELA, also must be approved at regular intervals by the ECB.

The ECB's role is key because it has been supporrting Greece's banks through its credit offering. A complete cutoff from the ECB, including a refusal of more ELA, could lead to a collapse of the banks. However, analysts say the central bank will be reluctant to make such a move unless politicians have exhausted all their options in finding agreement on resumption of aid to Greece or the government's request for easier terms on its bailout loans.

A banking collapse could leave the government with no other source of funds to rescue them, except for printing a new national currency.

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The European Central Bank has added pressure on the Greek government by withdrawing a key borrowing option for the country's banks as it struggles to avoid defaulting on its debts and crashing out of the euro currency union.
EU, European, Central, Bank, Greece
369
2015-31-04
Wednesday, 04 February 2015 05:31 PM
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