Cutting the ECB’s lifeline to Greek banks would push the country out of the eurozone and recklessly endanger the reputation of the ECB and the euro itself, argues Matthias Kroll.
Matthias Kroll is an economist at the World Future Council in Hamburg.
European decision makers are becoming increasingly aware of the fact that there is no legal foundation for the exclusion of Greece from the euro. Therefore, the view increasingly put forth is that the ECB should bring about a de facto exclusion of Greece by putting a stop to the ELA refinancing options of Greek banks. The ELA Eurosystem loans are currently the last opportunity for Greek banks to refinance themselves and avoid illiquidity.
However, the ECB is a central bank and can only uphold its international reputation if it acts as a central bank. The key task of a central bank is precisely the adequate provision of legal tender to maintain the solvency of the banking system.
The euro is Greece’s legal tender and this does not change because a government is unable to pay its debts. The end of ELA refinancing loans would not only affect an individual bank that is insolvent, but the entire Greek banking system.
The common solvency problems of all Greek banks, which are cited as the main reason for ending their refinancing by the ECB, are mainly due to the current political situation after the EU decided to end the refinancing of Greek debt. It is the consequent devaluation of the main asset of the banks – government bonds of their own country – that brings about the insolvency, which then serves as a reason for refusing to provide them with ELA credits.
The need to refinance the Greek sovereign debt by the Troika only became necessary because, as a result of the financial crisis, Greece could no longer refinance its debts at a sustainable market rate. However, if a politically induced, systemic crisis is the cause leading to the insolvency of the banks, the ECB must not refuse to refinance them. If it does, it is acting against its purpose and role as a central bank. A central bank which clearly violates its mission as the “lender of last resort” will lose credibility – and with it, the currency it issues.
If an entire banking system catches fire, it is the responsibility of any central bank to extinguish the blaze. This is the precise reason why central banks were created. Should the ECB put an end to the refinancing of Greek banks, it would be acting as an arsonist and not a fire-fighter.
The end of the refinancing option on ELA loans would not only destroy the banking system of a member state of the Eurosystem but also deprive it of its legal tender. Both constitute an existential attack on the entire country. The European decision-makers, who want to push Greece out of the euro, want this “political assassination” to be executed by the ECB so they can later wash their hands in innocence.
If the ECB wants to uphold its status as an internationally recognized and independent central bank, it cannot bow to such political demands.