ECB Modestly Boosts Emergency Lending for Greek Banks 

Europe’s central bank extends lifeline to financial institutions, as tense debt talks between Athens and creditors continue

The European Central Bank on Tuesday increased the amount of money Greek banks can borrow under an emergency lending program, according to a Greek bank official, extending a lifeline for the country’s banks, as tense negotiations between the Greek government and its creditors continue.

The ECB raised the amount the Greek central bank can lend banks to 80.2 billion euros ($89 billion) from €80 billion the previous week, according to the official.

“The increase of the emergency liquidity was smaller than previous times, as deposit outflows in Greek banks were significantly lower”, the official added.

Under the emergency-liquidity assistance program, or ELA, the Greek central bank lends money to its country’s financial institutions. The loans carry a higher interest rate than standard ECB loans, and the credit risk stays with Greece.

Greek banks were forced into ELA in February after the ECB suspended an exemption that had allowed banks to use junk-rated Greek government bonds as collateral for regular ECB loans.

The ECB also discussed, but decided to leave unchanged, the haircut schedule on Greek bonds used by Greek banks to draw money from the ELA program. “The Governing Council discussed the collateral haircut schedule for Greek government-linked assets used as collateral for ELA today. It will continue to closely monitor the situation,” an ECB spokesman said.

A haircut refers to a reduction in value that a central bank places on collateral that is posted in exchange for a loan. For example, if a bond has a 50% haircut, then the commercial bank wanting to borrow would only receive 50 cents on the euro in loan funding. Generally, a security that is considered riskier gets hit with a bigger haircut.

Greece’s new leftist government is in a protracted dispute with its international creditors over the future of the country’s rescue program since coming to power late January.

German Chancellor Angela Merkel and French President François Hollande will meet Greek Prime Minister Alexis Tsipras in a coming summit of European Union leaders in Riga, in an effort to push for a speedy solution to Greece’s financing woes.

Source: WSJ – ECB Modestly Boosts Emergency Lending for Greek Banks

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