The Greek Bluff May Be Working: ECB Does Not "Haircut" ELA Collateral

Following our post yesterday, in which we calculated the levels of ELA haircuts that would result in corresponding deposit haircuts, we - and the rest of the world - were patiently waiting to see if the ECB would commence using its nuclear option, first with a small increase in haircuts, then as we got closer to Sunday, with larger ones.

Even Goldman this morning wrote that "we see a sharp increase in haircuts as unlikely." but as we showed, even a modest increase, for example from 50% to 65%, would promptly impair Greek deposits and require deposit haircuts.


Of course, the far bigger question in any ECB haircut decision was whether the central bank would tip its hand that it is indeed a political entity, and perhaps tip the scales either way in Sunday's referendum.

Moments ago we got the answer, when the ECB not only kept the ELA frozen as expected, thus requiring the continuation of the Greek capital controls, but decided against a collateral haircut.


In other words, so far Varoufakis' thesis remains intact, and the ECB has refused to push the "nuclear option" launch button.

Recall what the finmin said last April:

... the real battleground will be the banks. As they did with Cyprus, where they threatened the government with an immediate suspension of the island nation’s ELA, so too in the case of Greece they will threaten to pull the plug on the Greek banks. Two points need to be made here. First, the Greek banks no longer hold any Greek government debt, which means that their collateral with the European System of Central Banks cannot be downgraded legally. Secondly, Frankfurt will have to think twice before it issues the threat of bending its own rules to close down Greek banks – since doing this would threaten to engulf the whole of the Periphery’s banking system into another cascading panic.

So far he has been proven correct, which may mean that his final bluff will ultimately pay off, namely that "Berlin will prefer to accommodate the Greek government and to look with a great deal more ‘kindness’ the ‘request’ for a debt relief conference. And if it does not, and wishes to bring the Eurozone down with it, let it do its worst, I say. "

As to whether today's ECB decision boosts the "No" vote on Sunday because it validates the hardline taken by Tsipras and Varoufakis, it may be best to let the next round of polling answer that question.