Lifeline to Greek banks

According to media reports on Thursday, the European Central Bank (ECB) has given Greece's national central bank the green light to provide up to 60 billion euros ($68.5 billion) in emergency funding for the country's struggling banks.

The ECB's Governing Council agreed that the Bank of Greece could tap the Emergency Liquity Assistance (ELA) credit line up to that amount, the news agency Reuters and German newspaper "Die Welt" reported, both citing unnamed sources within the ECB.

The central bank for the eurozone refused to officially comment on the reports, the two media said.

Greece's commercial banks are facing a fresh liquidity squeeze after the ECB decided on Wednesday to stop accepting Greek sovereign debt as collateral for bank refinancing. The move is seen as raising the stakes in a standoff between Greece's bailout lenders and the leftist-led government in Athens, which is looking to renegotiate its deal with its creditors - which at this point are principally various European nations and institutions.

Tighter screws

Greek banks relied heavily on the ELA facility at the peak of the eurozone debt crisis in 2012. In February this year, three of Greece's four major banks again started to tap ELA funding, as depositors had begun withdrawing their money amid fresh political uncertainty following the victory of the leftist Syriza party in the Jan. 25 election.

Now Greek banks appear to be suffering from deposit outflows that are worsening as foreign banks are closing off interbank repo lines due to heightened political risks.

Borrowing from the Bank of Greece's ELA window, however, is more expensive than direct ECB funding, and it needs the approval of the ECB Governing Council, which is made up of the bloc's national central bank governors. In order to tap ELA funding, a country must be following a reform program agreed with the eurozone. The ECB has so far kept the ELA's financial taps open for Greece and Cyprus.

Fears of backdoor state funding

Jens Weidmann, head of the German Bundesbank, already warned that ELA funding must only be awarded for the short term and for solvent banks.

"I'm of the view that we should apply strict standards with ELA. If that should have consequences for financial stability, then politicians must live up to their responsibilities," he told the business newspaper Börsenzeitung in an interview Thursday.

Germany, which is resisting re-negotiating Greece's bailout terms, is concerned that ELA funding could be abused if banks use it to buy Athen's short-term debt, so-called Treasury bills, to help cover the government's funding needs.

Instead of resorting to emergency liquidity from the ELA, the Bundesbank would prefer Greek banks to be refinanced using money earmarked for this purpose in the bailout programme agreed by Greece's previous government - a program which Athen's wants to exit by the end of the month.

uhe/js (Reuters, dpa, AFP)