Greece sets ECB members' nerves on edge
Central bankers say they are concerned that overly-strict orders to lenders could worsen the Greek turmoil. After building an institutional pillar that has supervised the euro area’s largest banks since November, the ECB is now facing one of the worst flare-ups in six years of sovereign-debt crisis.
Just as those U.S. policy makers in the 2008 financial crisis had to choose between the moral hazard of bailing out banks and the economic chaos of watching them fail, European officials are trapped between giving in to Greek cash demands and the political debacle of letting the country leave the euro.
The stress is emerging inside the ECB, affecting the interaction between central bankers in their new principles in Frankfurt’s east end, and bank supervisors installed in a temporary home two kilometers away. SSM Chair Daniele Nouy may give clues on the relationship with the Governing Council when she testifies to the European Parliament on Tuesday.
Her officials sought this month to prevent Greek banks from increasing holdings of short-term government debt, hours before critical meetings including Prime Minister Alexis Tsipras and Draghi. The move initially floundered as the ECB’s Governing Council recoiled at its severity and the monetary-policy goals that it referred to, according to people familiar with the discussions.
For some central bankers, the SSM proposal was an awkward intervention in crisis policy that threatened to upset the Governing Council’s measured strategy of addressing the Greek turmoil.
While the motion passed later with narrower terms of reference, the spat underlines a tension simmering within the ECB. With around 6,000 supervisory decisions annually to be made by the SSM and approved by the council, the potential for conflict or mistakes is quite significant.
The strictness and complexity of the ECB’s approach to Greece has attracted criticism from the country’s politicians.
Tsipras on Der Spiegel:
“The ECB is still holding onto the rope that is around our necks. By refusing to allow room for Greece to issue more treasury bills, the ECB is taking on a major responsibility.”
Time is running out for Greece to present a detailed account of economic reform measures needed to satisfy creditors and unlock bailout funds. The government is expected to present its proposals by Monday, as its cash reserves dwindle. At the same time, ECB officials face the task of preserving adherence to the EU’s prohibition against it funding member states.
The ECB is “worried about monetary financing, and as a supervisor it doesn’t like the amount of sovereign exposure,” said Dimitris Drakopoulos, euro-area economist at Nomura International Plc in London. “As the solvency of the banks depends on the economic and fiscal policies of the government, they have to keep a tight rein on it. Their policy is consistent on both sides.”