Thursday, July 9, 2015

Thomas Fazi — "A Few Clarifications About Greece And ELA"

A good part of the media (most notably in Germany) is framing the ECB’s emergency liquidity operations in Greece as ‘the ECB extending credits to Greek banks’. This is a huge misrepresentation of reality. The ECB is actually doing little more than what all central banks do (and, moreover, what it is legally bound to do by its own statute): provide liquidity (‘reserves’) to the banks of Member States and ‘promote the smooth operation of payment systems’ (Article 3.1 of the Statute of the European System of Central Banks). The only difference is that – contrary to ‘normal’ liquidity – the ELA is a much more expensive form of liquidity for the banks. Moreover, ELA liquidity isn’t extended directly by the ECB but by the national central banks (in this case the Bank of Greece), which – since national central banks can’t ‘print’ money in the eurozone – in turn ‘borrows’ the money from the ECB through the infamous – in Germany at least – TARGET2 system.
Since all national central banks contribute to the ECB, this increases the exposure of these central banks vis-à-vis the central bank engaging in the ELA. Does this mean that the other central banks – and most importantly, as far as Germany is concerned, the Bundesbank – risk ‘losing money’ as a result of the ELA (if, say, Greece goes bust)? Or, even worse, that the ECB risks defaulting? As for the first question, technically the answer is yes. But the mistake here – and I’m afraid that this is a common mistake among economists – is to assume that a central bank operates likes normal banks, or even worse like households. The point to understand is that a central bank – such as the ECB – cannot default because, simply put, it has the power to print its own currency. 
Here are some comments on the issue. The first one is by Paul De Grauwe….
The real problem here isn’t so much that the ECB has continued the ELA throughout the crisis – as it was legally bound to – but that it has deliberately provoked a bank run and an impending banking crisis by placing a limit on the ELA, and threatening to pull the plug altogether on the Greek banks. This is a clear violation of the ECB’s mandate – which states that the central bank’s goal is to ‘promote the financial stability’ of the euro area – and would be the first time in history that a central bank deliberately uses its power to destroy a country’s economy.
Social Europe Journal
"A Few Clarifications About Greece And ELA"
Thomas Fazi

1 comment:

Anonymous said...

The ECB can't default. But since, like other central banks, it redistributes its operating "profits" to its members, then if the ECB suffers balance sheet losses as a result of issuing more euros than it takes in, those losses will result in a limitation of disbursements to the member banks, and in turn, to the governments.