ECB to examine waiver restoration on June 2

In its board meeting on June 2, the European Central Bank will examine whether to reinstate the waiver on its rule preventing the use of junk bonds as collateral for the supply of cash to banks for Greece. According to a Bloomberg report on Wednesday, the restoration of the waiver is conditional on the successful completion of the Greek government’s talks with the country’s creditors at the May 24 Eurogroup.

Bank officials say that if the waiver is restored, a large part of government paper totaling 15 billion euros in Greek banks’ portfolios will again be accepted as collateral by Frankfurt for cheap liquidity, whereas now it is only accepted in return for funds via the costly emergency liquidity assistance (ELA) mechanism.

The waiver reinstatement will reduce the cash Greek banks get from the ELA by at least 10 billion euros, from 69.1 billion euros today to about 59 billion. The total financing of the local credit sector from the Eurosystem adds up to almost 110 billion euros, of which 69 billion is from the ELA and just under 40 billion from the normal funding channel of the ECB. The waiver will change the balance to 59 billion and 50 billion respectively. Normal funding comes at an interest rate of 0.05 percent, against a 1.55 percent rate for ELA cash.

In August 2014 domestic lenders’ exposure to Eurosystem liquidity amounted to 44 billion euros, with zero exposure to the ELA, thanks to the improvement in economic conditions in Greece. However, the prospect of a snap election from November 2014 led to a fresh outflow of deposits and increased exposure to ECB cash.