ECB Saves Greece From Certain Bankruptcy. Again

Tyler Durden's picture

A few days ago we wrote that "Greece Runs Out Of Money. Again" because it did. The country, which is permanently locked out of the bond markets, would be down to a negative cash balance as soon as its August bond payment to the ECB was made. The reason is that the Troika continues to delay its decision. whether or not to hand over Greece its next monthly allowance. So with the country threatening to once again be on the front page as math rears its ugly head, the ECB has decided to take the bold step and admit that in lieu of even remotely credible collateral pledged and repledged in the ponzi repo system, the ECB has no choice but to expand the universe of eligible "collateral" against which it will provide cash. From Reuters: "The ECB's Governing Council agreed at its meeting on Thursday to increase the upper limit for the amount of Greek short-term loans the Bank of Greece can accept in exchange for emergency loans, the newspaper said in an advance copy of the article due to appear in its Saturday edition."

As a reminder, on July 20 the ECB pretended to act in a prudent fiduciary capacity and halted the acceptance of worthless Greek bonds as eligible ECB collateral. Naturally, this was merely an epic case of sweeping under the rug, because bonds eligible for traditional collateral had already ran out, even as the ECB greenlighted the continued provisioning of funding via the Emergency Liquidity Assistance, or ELA, in which the pathway of repledging a liability as a money good asset took on one extra step by using a national central bank as an unnecessary intermediary. The reason: merely to obfuscate the fact that actual money good collateral, and by implication, assets, no longer exist, allowing the Eurosystem to accept more and more worthless "assets" in exchange for frashly printed euros.

This is precisely what just happened:

Until now the Bank of Greece could only accept T-Bills up to a limit of 3 billion euros ($3.70 billion) as collateral for emergency liquidity assistance (ELA) but it has applied to have this limit increased to 7 billion euros, the daily said, citing central bank sources.

 

The ECB Governing Council gave this wish the green light, the paper said.

 

The move should enable the Greek government to access up to an extra 4 billion euros of funds, the paper said, adding that this should ensure the country keeps its head above water until the "troika" of the European Union, the European Central Bank and the International Monetary Fund decide on the disbursement of the next tranche of money from its aid program in September.

So does this step-wise increase in the pool of eligible collateral mean that eventually each peripheral country will run out of assets pledgable for cash (which in turn is used to pay interest to the ECB and various other "Official" institutions)? Yes, at least under the current regime. Because when all possible assets that Greece has have been handed over to the ECB for safekeeping just so the country is "allowed" to stay in the Euro and continue to pay its institutional interest, all the while allowing for "privatization" asset sales to take place for various Western banks.

Sadly, even if the ECB were to lower it eligible collateral threshold to zero, the fun will eventually end in a world of finite assets, because while one can print electronic money with the push of a button, an "asset" by implication takes at least some effort, and cost to create.

This is just what we explained back in May, when we quantified just how much borrowing capacity unde rthe ELA Greece, which is now less than a shell of a real economy, truly has.

From Quantifying The Plan Z Dry Powder - This Is The Greek ELA Borrowing Capacity

We already posted a full run down from JPM on what the immediate costs from a Greek EMU exit would be (starting at €400 billion and going higher), but one point that bears repeating is just how much borrowing capacity Greece has under the ELA in the aftermath of today's news that the ECB is leaving Greek banks to fend for themselves until such time as the Greek recapitalization payment is wired over to Greece, which the ECB has defined simply as "soon." The answer: woefully inadequate, and certainly not enough to backstop the remaining Greek deposits of €170 billion as of the end of March (likely far less now), at €65 billion. And that's an upside estimate: as JPM says "The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA." Remember: this is all just one giant game of chicken - Greece's Syriza has bet the farm that the cost from a Greek fallout is just too big to Europe and the terms of the hated "Memorandum" will be adjusted, while to Europe, on the other hand, the outcome to Greece, at least according to Europe and the IIF's Dallara will be "between catastrophic and armageddon." So... Who blinks first?

From JPM:

Greek banks have run out of ECB eligible collateral already and can only access Bank of Greece’s ELA, but even with ELA, the collateral,typically loans, is not unlimited. They have already borrowed €60bn via ELA which, assuming 50% haircut corresponds to around €120bn of loan collateral. Outstanding loans are €250bn, so Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA. This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March. The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA. The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2.

Once TARGET2 starts unwinding, with a massive €644 billion claim on the Eurosystem by the Bundesbank, and the realization that an imploding heretofore "contingent" and suddenly all too real liability amounting to 25% of German GDP means an in-kind collapse in living standards, then the simmering German anger will go truly parabolic.