ECB did the right thing with Greek emergency funding, study says

The European Central Bank was right to approve expanded lending to Greek banks during the bailout crisis this year, as doing otherwise would have usurped the decisions of elected politicians, according to a new study.

“A termination of ELA by the ECB would have preempted the higher-order decision-making process of policy makers at the supranational level,” Martin R. Goetz, Rainer Haselmann, Jan Pieter Krahnen and Sascha Steffen wrote in a study published by the SAFE policy center in Frankfurt. “There is no alternative route for the ECB Governing Council in the current setting – where the health of sovereigns and the banking sector are so intertwined – than to prolong and extend the ELA credit line, until a decision at the supranational level is found.”

The ECB raised the cap for Emergency Liquidity Assistance for Greek banks from 59.5 billion euros in February to as much as 90.4 billion euros in July, as a slow-motion bank run prompted by doubt that the country would stay in the euro sapped reserves. Some Governing Council members, including Bundesbank President Jens Weidmann, argued that in doing so the ECB was breaking its own rules by propping up insolvent lenders.

The authors of the report urged the ECB to be more transparent in its communication of ELA decisions, as that would help market participants decipher its actions in times of crisis. The regular review of the lending facility meant that during political tension in Greece market participants had no certainty that funding, which is technically made by the Bank of Greece with ECB approval, would continue.

“This is particularly relevant for the current institutional setup of the euro zone, which may push the central bank in a corner, where its actions can be interpreted as pre- empting the political decision-making process,” the authors wrote. “We encourage the ECB to be less opaque in explaining its motivation for providing ELA and to disseminate more detailed data on the size and composition of outstanding ELA positions.”

ECB President Mario Draghi said on July 16 there is “absolutely no reason” for secrecy on ELA when it is deployed to address a “massive systemic problem.”

[Bloomberg]