Last night saw something which opened up the Euro area debate to many who may have missed one of its themes. I will come to the detail in a moment but my theme that elected politicians in the Euro area have abrogated economic policy and handed it to the European Central Bank could not have been reinforced much more strongly. Does anybody recall the election manifestoes of the 25 members of the ECB Governing Council ? No? That is because they have never stood for election. Even worse they were fewer in number if there was an actual vote because under the new rotation system the Governors of the central banks of France, Ireland and especially significant here Greece and Cyprus would not have had a vote. So we would have been down to 21 members who apparently feel that they can dictate economic policy to the new elected government of Greece. As we shall see the ECB has moved beyond its mandate of monetary policy to the more debatable arena of overall economic policy but has also intervened in politics against a government which could not have much more of a fresh mandate.
What did the ECB do?
The move is described below and is a type of double-negative.
The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in Eurosystem monetary policy operations despite the fact that they did not fulfil minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules.
The reason I wrote double-negative above is that the ECB had previously broken its own rules to allow Greek sovereign debt to be used as collateral with it. Now it is saying no to its previous no and leaving Greece cast adrift.
Suspension is in line with existing Eurosystem rules
What use are rules it applies at its own whim? Not much indeed we could go wider and wonder what the rules actually are as they seem rather malleable. Indeed we saw another example of this sort of thing from Germany’s Finance Minister Schaeuble yesterday. (h/t @mhewson_CMC and apologies for the capitals).
SCHAEUBLE: EURO STATES MUST ADHERE TO 60% MAASTRICHT DEBT RULE
His own country has a national debt to GDP ratio of 75% according to Eurostat and the Euro area average in 92%. Alice In Wonderland wasn’t the half of it.
Why, sometimes I’ve believed as many as six impossible things before breakfast.
Another example of this is Peter Praet of the ECB Governing Council who is being reported as saying this to Les Echos this morning.
ECB Rules Transparent, No Exceptions for Greece
Well since around 9 pm last night anyway!
Who would this impact?
The initial impact would be felt by the Greek banks and if we consider them in isolation then they would be left looking to find a home for collateral that will not be usable at the ECB as of the 11 th of this month. They will find it at the Bank of Greece as the situation plunges one more time into an Alice In Wonderland world as the ECB moves the risk to the national central bank which is a constituent part of it and has a 2.9% share of it. If you like it in geographical terms the risk moves from Frankfurt to Athens.
So there is a clear signal here of the ECB reigning back its support for Greece and to some extent ring-fencing itself at least to the initial round of effects. For the banks there are a litany of issues of which the major ones are fear and contagion and something which appeared to be happening anyway which is a loss of deposits. A more explicit cost is that what is called ELA (Emergency Liquidity Assistance) funding has so far been more expensive than borrowing from the ECB itself.
There was an impact as markets opened earlier
This was calmed a little later by the ECB leaking news that it has allowed the Bank of Greece to do an extra 10 billion Euros of ELA if necessary. Yes it will be necessary and sooner or later markets will get around to thinking that it is not enough. Also we need some perspective here as Greek bank shares have to look -up quite a long way to see even bargain basement levels
Greek government bonds have also fallen heavily today and yields have soared. But whilst there is a media impact the actual financial impact is low as Greece is unlikely to be issuing any bonds any time soon. It did issue some short-dated bills yesterday at 2.75% which frankly seems remarkably cheap so I hope that readers do not have any!
What about a bank run?
Back in the day when I was an economics student I was taught that one of the roles of a central bank was to prevent bank runs and if they happened to ameliorate them. Whereas we see the ECB acting as if it is on the verge of firing the starting gun on one. This does of course reinforce my theme that it is not a proper central bank but even for it this is rather extraordinary.
Is Grexit more likely?
Yes but sadly it is still a low percentage chance as I expect the various game players to have more than a few extra throws of the dice before this is over. Another alternative can be seen a little to the south of Greece on the island of Cyprus. Greece may find itself mulling the name of the group “House of Pain” as it heads down a road of capital controls and haircuts from bank deposits in the way that Cyprus did. Of course should bank deposits start to see such a possibility well what would you do?
As the news was released last night I likened this move to a much nastier tackle than anything I had seen in the Bolton versus Liverpool FA Cup replay. The more I think about it the worse it gets in every respect. The fundamental issue is that a group of unelected supposed technocrats are able to dictate to a recently elected government. Much of that is the fault of the elected politicians of the Euro area who vacated the scene and left what are their job and roles to the ECB.
In addition as a tactical move it poses problems as the ECB has left itself on the road below if Greece plays hard ball in response and continues its “no to blackmail” line.
We’re on a road to nowhere
Come on inside
Takin’ that ride to nowhere
We’ll take that ride
After all there is some 80% of Greek debt in official hands including the ECB’s. As Joseph Stalin might have put it.
How many divisions does the ECB have?
The critique I have long applied to the Bank of England also applies to the ECB and I suggest the same remedy.
Also I have a further thought and it does indicate quite a change. As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced in1997 there need to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.
I was interviewed on Share Radio’s Morning Money show earlier so for those of you who prefer to listen to my analysis rather than read it here it is.