May 21, 2012
The European Central Bank is keeping Greek banks afloat with emergency assistance even though urgently needed banking reforms have been put on hold in the election campaigns. As Greeks withdraw money from the banks amid fears of a euro exit, the ECB's own risk exposure is mounting.
When the head of Greece's central bank, George Provopoulos, recently met with his European counterparts, the session turned into a confession. His fellow Greeks had just withdrawn €800 million ($1.022 billion) from their bank accounts, within just a few days. Consequently, at a meeting of the Governing Council of the European Central Bank (ECB) last Tuesday, Provopoulos had to ask for money -- once again.
Most Greek banks are currently cut off from the usual ECB lines of credit. They no longer have sufficient collateral. A number of banks are even currently operating without sufficient capital as a risk buffer for their activities. Indeed, Provopoulos had to accept last week that yet another crop of Greek banks were branded as unfit for ECB refinancing.
These zombie banks are being kept alive with help from the so-called Emergency Liquidity Assistance (ELA) -- a rescue aid program managed by Provopoulos. At every session of the Governing Council, he has to have these special allocations approved.
For the time being, he has succeeded. Last Tuesday, the ceiling for the amount of aid that Provopoulos is allowed to give his banks was even raised again, from roughly €90 billion to €100 billion. But the Council is harboring increasing doubts about this permanent subsidy.
The central bankers are caught in a moral conflict. Cutting off the flow of money would have disastrous consequences: Greece would quickly run out of money. The population would soon not even have enough cash to pay for its daily purchases.
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