GREECE: Sinn and Fuest oppose more ELA for banks

Ifo President Hans-Werner Sinn and his future successor Clemens Fuest have warned against extending emergency liquidity assistance (ELA) to Greek commercial banks as of Monday.

The emergency credit line now stands at 89 bln euros, the same level as at end-June.
“The amount of ELA credit that has been used since the beginning of the year to purchase Greek government bonds likely exceeds 10 bln euros and is thus far higher than the 7.5 bln euros in emergency funding discussed in negotiations with the troika,” both economists wrote in a joint article for the Handelsblatt.
“When the government bonds held by the Greek banks became due and the banks would have received fresh cash, the banks were allowed to use the redemption sums to purchase newly issued government bonds, instead of repaying ELA credit. So the Greek government was indeed financed by ELA credit,” they explain.
In other words, the European Central Bank (ECB) “has delayed the insolvency of the Greek government formally declared by the EFSF on 3.7. 2015 since the beginning of the year. Without ELA emergency funding, the Greek government would have gone bankrupt far earlier and negotiations would have ended months ago,” wrote the economists.
ELA credit is emergency credit from freshly created money that the Greek central bank is allowed to grant commercial banks in its own country on its own account, if two thirds of the ECB Council has no objection.
“ELA credit is supposed to relieve liquidity shortages experienced by commercial banks, not to give commercial banks that are effectively insolvent the opportunity to support defaulting states, as that is the task of fiscal policy. The ECB has violated this principle,” concluded both economists.