Is the ECB being unfair to Greece?

March 11, 2015

By Hugo Dixon

Hugo Dixon is Editor-at-Large, Reuters News. The opinions expressed are his own.

Is the European Central Bank being unfair to Greece? The new left-wing government thinks so. It complains that the euro zone’s central bank is meting out tougher treatment than it gave the previous right-wing administration that came into office almost three years ago. This is a potentially toxic accusation.

The ECB’s inconsistent approach is justified because Athens isn’t yet working well with its creditors. But, if that changes, the central bank – which holds a conference call on Greece on March 12 – should be more flexible.

Back in 2012, the freshly elected government of Antonis Samaras was running out of cash. It hadn’t yet satisfactorily completed the terms of a bailout plan agreed by its predecessor with Greece’s creditors and couldn’t access cash under that scheme.

So Athens issued more short-term Treasury Bills to Greek banks. They got cash, in turn, by using the bills as collateral with the Eurosystem, the euro zone’s network of central banks. To enable this operation, the ECB temporarily raised the amount of T-bills that Greek banks could use as collateral with the Eurosystem from 3.5 billion euros to 7 billion euros.

Fast forward to 2015. The new government of Alexis Tsipras is also running out of cash. It, too, hasn’t implemented the terms of the bailout plan agreed by its predecessor and so can’t access cash from that scheme. It now wants to issue more T-bills to Greek banks.

But the ECB is refusing to raise the collateral cap. It has also told Greek banks not to increase their credit exposure to the government.

Tsipras complained in an interview with Der Spiegel at the weekend that the ECB has a noose round Greece’s neck. Meanwhile, his finance minister, Yanis Varoufakis, told Corriere della Sera that the ECB was flexible back in 2012 but was now being disciplinary.

Mario Draghi, the ECB president, attempted to justify the tough approach last week. He said that if a bank brought collateral to the ECB and then used the cash to buy government debt, that constituted monetary financing of a state by the central bank. Monetary financing, whether direct or indirect, was prohibited by Article 123 of the European Union’s Lisbon Treaty, he added.

There are two things wrong with this argument. First, if the ECB would breach the treaty by raising the collateral cap today, why wouldn’t it also have broken the law back in 2012? Second, Article 123 of the treaty prohibits only direct, rather than indirect, funding of governments.

In fact, the ECB has been “indirectly” funding governments quite a lot in recent years. Think of its new quantitative easing programme, which involves buying over 1 trillion euros of government bonds. Such operations are controversial, but they don’t cross the line into illegality if they are done in the right way.

But if the monetary financing argument is somewhat spurious, the ECB still has reason for treating the Tsipras government differently from its predecessor.

Back in 2012, the new Samaras government was broadly speaking cooperating with its creditors, although it was still arguing about details. The ECB could be therefore reasonably confident that it would ultimately be able to access cash from the bailout programme. So relaxing the T-bill limit could be justified as a temporary bridge measure.

By contrast, the new Tsipras government is struggling to cooperate with its creditors. Weeks have been wasted on terminological disputes such as whether the trio of organisations monitoring Greece’s compliance with the bailout plan should be called the troika or merely “the institutions,” and whether they should meet in Athens or Brussels.

The finance minster has also raised the possibility of holding a referendum if its creditors are intransigent and other ministers have threatened to block privatisation plans. So the ECB can reasonably take the view that the bailout plan is not on track and justify the differential treatment.

However, things would change if Tsipras started to work more constructively with Athens’ creditors. He certainly needs to get his skates on as the government will probably run out of cash in a few weeks. In such a scenario, the ECB should be willing to relax the T-bill caps – something that Draghi has given a hint it might be open to.

It may not come to this. The euro zone creditors have said they may advance Greece some cash if it moves forward rapidly with its reforms – meaning it may then not need to issue more T-bills. And, of course, Tsipras may continue to waste time. In that case, he will have only himself to blame if Greece goes bust.

On the other hand, if the new government does engage more constructively only to find the ECB maintains its hard line, the central bank would be open to the criticism that it was being inconsistent and unfair. Theories would circulate that it was deliberately undermining Tsipras because of the colour of his politics. If Athens then was plunged into bankruptcy, recriminations would fly thick and fast – and not just from the Greek left. The shocks would reverberate across Europe.

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