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E.C.B. Could Be Power Broker in Solving Greek Debt Crisis E.C.B. Could Be Power Broker in Greek Debt Crisis
(about 14 hours later)
FRANKFURT — As Athens and Brussels engage in a showdown over Greek debt, the ultimate power broker may reside in neither of those European capitals.FRANKFURT — As Athens and Brussels engage in a showdown over Greek debt, the ultimate power broker may reside in neither of those European capitals.
Instead, the outcome may largely be determined in Frankfurt, where Mario Draghi presides over the European Central Bank.Instead, the outcome may largely be determined in Frankfurt, where Mario Draghi presides over the European Central Bank.
The new leftist-led Greek government, facing a Friday deadline for coming to terms or risking a cutoff of loan money, plans to submit a new proposal on Thursday. Depending on the specifics, it might receive no better reception from eurozone finance ministers than previous Greek proposals in recent weeks.The new leftist-led Greek government, facing a Friday deadline for coming to terms or risking a cutoff of loan money, plans to submit a new proposal on Thursday. Depending on the specifics, it might receive no better reception from eurozone finance ministers than previous Greek proposals in recent weeks.
But the ability of Greece and its banks to remain solvent could depend just as much on Mr. Draghi and a series of decisions by the European Central Bank that might determine the financial fate of Greece — and perhaps the future of the entire 19-country currency union.But the ability of Greece and its banks to remain solvent could depend just as much on Mr. Draghi and a series of decisions by the European Central Bank that might determine the financial fate of Greece — and perhaps the future of the entire 19-country currency union.
With political leaders deadlocked, it will be up to Mr. Draghi and the central bank’s Governing Council to decide whether to keep struggling Greek banks afloat. The decision could amount to a verdict on whether the Greek government can avoid financial collapse, continue to service its debts and remain a member of the currency bloc.With political leaders deadlocked, it will be up to Mr. Draghi and the central bank’s Governing Council to decide whether to keep struggling Greek banks afloat. The decision could amount to a verdict on whether the Greek government can avoid financial collapse, continue to service its debts and remain a member of the currency bloc.
The Governing Council approved more emergency funding for Greek banks late Wednesday, raising the amount to 68.3 billion euros, or about $78 billion, from €64.8 billion, according to a person with knowledge of the proceedings, who spoke on the condition of anonymity.The Governing Council approved more emergency funding for Greek banks late Wednesday, raising the amount to 68.3 billion euros, or about $78 billion, from €64.8 billion, according to a person with knowledge of the proceedings, who spoke on the condition of anonymity.
But the amount, which helps make up for an exodus of deposits, was only about one-third of what the Greek central bank had requested. And the aid for Athens lenders could become more tenuous in coming weeks if political and economic turmoil pushes them to the brink of failure. Under its charter, the central bank is allowed to lend money only to solvent banks.But the amount, which helps make up for an exodus of deposits, was only about one-third of what the Greek central bank had requested. And the aid for Athens lenders could become more tenuous in coming weeks if political and economic turmoil pushes them to the brink of failure. Under its charter, the central bank is allowed to lend money only to solvent banks.
“The E.C.B. may be faced with a very difficult decision, and I don’t know how they would resolve it,” said Carl B. Weinberg, chief economist of High Frequency Economics. “There is no book on this. This a brave new world.”“The E.C.B. may be faced with a very difficult decision, and I don’t know how they would resolve it,” said Carl B. Weinberg, chief economist of High Frequency Economics. “There is no book on this. This a brave new world.”
Although Europe’s financial destiny has landed repeatedly in Mr. Draghi’s lap, he does not seem to relish his role. Central banks are supposed to be above politics, and recently Mr. Draghi has tried to keep as much distance as possible between himself and the messy bargaining process underway in Brussels between Greece and the rest of the eurozone.Although Europe’s financial destiny has landed repeatedly in Mr. Draghi’s lap, he does not seem to relish his role. Central banks are supposed to be above politics, and recently Mr. Draghi has tried to keep as much distance as possible between himself and the messy bargaining process underway in Brussels between Greece and the rest of the eurozone.
But analysts say it will be all but impossible for the European Central Bank to avoid the fray.But analysts say it will be all but impossible for the European Central Bank to avoid the fray.
“The E.C.B. will be very reluctant to influence the political outcomes at all,” said Marie Diron, a senior vice president at Moody’s Investors Service and former economist at the European Central Bank. “It will stick to monetary decisions. But there are implications to these monetary policy decisions.”“The E.C.B. will be very reluctant to influence the political outcomes at all,” said Marie Diron, a senior vice president at Moody’s Investors Service and former economist at the European Central Bank. “It will stick to monetary decisions. But there are implications to these monetary policy decisions.”
In an example from this month, the Governing Council blocked Greek banks from using their holdings of their government’s bonds as collateral for cheap central-bank loans. The Greek bonds have been appraised at junk status by debt ratings agencies.In an example from this month, the Governing Council blocked Greek banks from using their holdings of their government’s bonds as collateral for cheap central-bank loans. The Greek bonds have been appraised at junk status by debt ratings agencies.
The move was an attempt to separate the problems of Greek banks, which face an outflow of cash from alarmed depositors, from the larger debate about the government’s debt load and the terms under which it can continue receiving European aid.The move was an attempt to separate the problems of Greek banks, which face an outflow of cash from alarmed depositors, from the larger debate about the government’s debt load and the terms under which it can continue receiving European aid.
Unable to trade their Greek bonds for loans, struggling Greek lenders have to tap their own central bank for emergency loans. Ultimately, the E.C.B. has the ability to cut off that funding as well.Unable to trade their Greek bonds for loans, struggling Greek lenders have to tap their own central bank for emergency loans. Ultimately, the E.C.B. has the ability to cut off that funding as well.
Since the eurozone debt crisis began in 2010, the European Central Bank has repeatedly made decisions with profound political ramifications.Since the eurozone debt crisis began in 2010, the European Central Bank has repeatedly made decisions with profound political ramifications.
In November 2010, Mr. Draghi’s predecessor, Jean-Claude Trichet, told the prime minister of Ireland that the central bank could not continue providing emergency cash to Irish banks unless the country applied for a European Union bailout.In November 2010, Mr. Draghi’s predecessor, Jean-Claude Trichet, told the prime minister of Ireland that the central bank could not continue providing emergency cash to Irish banks unless the country applied for a European Union bailout.
That perceived strong-arming by Mr. Trichet remains a sore point in Ireland. The European Central Bank denies that it pushed Ireland into a bailout program, saying that economic circumstances forced the country to seek aid.That perceived strong-arming by Mr. Trichet remains a sore point in Ireland. The European Central Bank denies that it pushed Ireland into a bailout program, saying that economic circumstances forced the country to seek aid.
And in 2013, under Mr. Draghi, the European Central Bank threatened to cut off emergency aid to commercial banks in Cyprus unless the country agreed on a rescue plan with the European Union and the International Monetary Fund. Some bank depositors in Cyprus have since sued in European Union courts, blaming the central bank for losses they suffered when one of the country’s largest lenders shut down as part of the bailout plan.And in 2013, under Mr. Draghi, the European Central Bank threatened to cut off emergency aid to commercial banks in Cyprus unless the country agreed on a rescue plan with the European Union and the International Monetary Fund. Some bank depositors in Cyprus have since sued in European Union courts, blaming the central bank for losses they suffered when one of the country’s largest lenders shut down as part of the bailout plan.
Mr. Draghi has also intervened at crucial moments to save the currency bloc when political leaders appeared unable to take the necessary action. Most famously, he promised in 2012 that “the E.C.B. is ready to do whatever it takes to preserve the euro.”Mr. Draghi has also intervened at crucial moments to save the currency bloc when political leaders appeared unable to take the necessary action. Most famously, he promised in 2012 that “the E.C.B. is ready to do whatever it takes to preserve the euro.”
The vow, later backed up by an official statement from the Governing Council, tamed bond markets and prevented interest rates on government bonds from making governments’ borrowing costs unsustainable.The vow, later backed up by an official statement from the Governing Council, tamed bond markets and prevented interest rates on government bonds from making governments’ borrowing costs unsustainable.
Political leaders complain about the European Central Bank’s getting mixed up in their affairs, yet they have also depended on it to make tough decisions when they are unable to. Such a day of reckoning may be arriving again soon.Political leaders complain about the European Central Bank’s getting mixed up in their affairs, yet they have also depended on it to make tough decisions when they are unable to. Such a day of reckoning may be arriving again soon.
According to European rules, the central bank should cut off emergency cash to Greek banks as soon as it determines they are insolvent. But while European leaders are in the middle of negotiations with Greece, the central bank is unlikely to take that drastic step, which would require a two-thirds vote of the Governing Council.According to European rules, the central bank should cut off emergency cash to Greek banks as soon as it determines they are insolvent. But while European leaders are in the middle of negotiations with Greece, the central bank is unlikely to take that drastic step, which would require a two-thirds vote of the Governing Council.
But the central bank could privately warn the Greek government that its patience is wearing thin, as it did in Ireland in 2010. The central bank declined to comment this week on emergency aid to Greece.But the central bank could privately warn the Greek government that its patience is wearing thin, as it did in Ireland in 2010. The central bank declined to comment this week on emergency aid to Greece.
Further complicating the decision is the European Central Bank’s new role as supervisor of European banks. This regulatory authority, which took effect in November, should give the central bank better information about what is happening inside the Greek banks, as well as leverage over management.Further complicating the decision is the European Central Bank’s new role as supervisor of European banks. This regulatory authority, which took effect in November, should give the central bank better information about what is happening inside the Greek banks, as well as leverage over management.
But there is also the potential for embarrassment if the central bank determines that a Greek lender is insolvent. It was only in October that the European Central Bank gave clean bills of health to three of Greece’s four largest commercial banks (Alpha Bank, Piraeus Bank and the National Bank of Greece) and said that the other, Eurobank, had only a relatively small capital shortfall.But there is also the potential for embarrassment if the central bank determines that a Greek lender is insolvent. It was only in October that the European Central Bank gave clean bills of health to three of Greece’s four largest commercial banks (Alpha Bank, Piraeus Bank and the National Bank of Greece) and said that the other, Eurobank, had only a relatively small capital shortfall.
Representatives of the Greek banks declined to comment.Representatives of the Greek banks declined to comment.
There is no question that Greek banks face enormous problems. A brutal economic downturn and an unemployment rate of nearly 26 percent mean that many businesses and individuals are unable to repay their loans. Among the largest banks, about a third of all loans are classified as nonperforming, meaning the debtor shows clear signs of not being able to pay in full.There is no question that Greek banks face enormous problems. A brutal economic downturn and an unemployment rate of nearly 26 percent mean that many businesses and individuals are unable to repay their loans. Among the largest banks, about a third of all loans are classified as nonperforming, meaning the debtor shows clear signs of not being able to pay in full.
Analysts say the European Central Bank is likely to avoid cutting off aid to the Greek banks as long as possible. At about €65 billion, the emergency aid to Greek banks is still far below levels they received at the peak of the crisis in 2012.Analysts say the European Central Bank is likely to avoid cutting off aid to the Greek banks as long as possible. At about €65 billion, the emergency aid to Greek banks is still far below levels they received at the peak of the crisis in 2012.
“If the E.C.B. believes one of the banks is insolvent or undercapitalized, then they would have to pull the trigger,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “But we are not there yet, and I don’t see we would be there very soon.”“If the E.C.B. believes one of the banks is insolvent or undercapitalized, then they would have to pull the trigger,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “But we are not there yet, and I don’t see we would be there very soon.”
The consequences of cutting off aid would be dire. The government would have to impose capital controls to keep money from fleeing the country. The economy would get even worse. Greece might have to leave the eurozone.The consequences of cutting off aid would be dire. The government would have to impose capital controls to keep money from fleeing the country. The economy would get even worse. Greece might have to leave the eurozone.
Mr. Draghi certainly does not want to go down in history as the person who set in motion forces that drove Greece from the eurozone. But a prolonged political stalemate could leave him and the central bank’s Governing Council no choice.Mr. Draghi certainly does not want to go down in history as the person who set in motion forces that drove Greece from the eurozone. But a prolonged political stalemate could leave him and the central bank’s Governing Council no choice.