Starting a Self-Fulfilling Prophecy

The Greek saga is long in failings on all sides. The most under-reported and under-rated failing is the action by the ECB when the Governing Council decided not to include Greece in its OMT programs and then to restrict Emergency Liquidity Assistance to the maximum of Euro 89.5 bn, and to renew it only on a daily base. This decision is a flagrant violation of the duty of the ECB to guarantee the smooth functioning of the payment system within member states of the Eurozone. This duty has got extra support by the European banking union, and still the ECB is not doing its duties. Rather then acting as a lender of last resort for banks that are having liquidity problems but have passed all stress tests and can be seen as solvent.

By refusing a proper lender of last resort job for Greek banks the ECB is severely worsening the situation. It will only need a few more days and Greek banks will move from being illiquid to being insolvent. Jens Weidmann, the head of the German Central Bank, is the driving factor for this violation by actively supporting the agenda of those in German politics who want to make Greece leave the Eurozone. His argument that any more ELA as well as the inclusion of Greece into OMT would be monetization of the Greek state budget and thus should be forbidden at all is deeply flawed. ELA is provided by the Greek Central Bank and not by the ECB, implying that potential losses are born by the Greek central bank, and the funds are meant to substitute banks for the withdrawals of deposits – a classical lender of last resort function. The funding thus is not going towards the public budget, and this actually is forbidden by ECB regulations anyways.

The German financial economist Martin Hellwig made the argument the other day that the ECB’s regulation not to hand emergency funding to insolvent banks is a rather outdated regulation that should be overcome quickly. Central banks have the unlimited capacity to ‘print’ money and should make use of this capacity in times of banking stress and even bank run – like in Greece. Rejecting such an action either by violating its own principles or by seeking refuge to an outdated regulation contributes to the crisis. And yet, the Governing Council already informed Greece that it would retreat ELA if there is no new agreement after Sunday. No doubt, the ECB has become a deeply political institution that does not hesitate to intervene in political conflict in a very asymmetrical manner.