According to the article, the European Central Bank has disallowed the Greek government and Greek banks from putting up their own government bonds as collateral for loans from the ECB, dissolving a waiver previously granted to the Greeks despite being in junk bond status and having technically already been disallowed from this practice. This served as a warning shot to the potentially volatile and new Greek leftist, anti-austerity government, trying to prevent the new government from demanding a renegotiation of terms of debt and austerity in exchange for payment of debts incurred by the government. As a result, the new Greek government will be heavily reliant on Emergency Liquidity Assistance with its harsher array of terms and conditions, effectively giving over more control of the Greek economy to planners at the ECB.
The ECB, the central bank for all nations sharing the Euro as a currency, finds itself in a precarious position, significantly of its own making. The Greek sovereign debt crisis sparked the pan-Euro debt crisis, nearly causing the currency to collapse due to the heavy debt burdens of generally smaller, less-producing nations, such as Greece, Cyprus, and others, with the crisis nearly causing a crisis of confidence in larger nations with larger GDP, such as France. The ECB, mostly controlled by the solvent Germany, forced heavy austerity in exchange for financial rescue to keep the monetary status quo. Since then, the Euro crisis has been in a sort of suspended animation. This decision is an effort to keep the Euro at status quo on a trans-national scale to prevent wholesale collapse of either Greece or the Euro.
http://www.economist.com/news/finance-and-economics/21642210-how-european-central-bank-can-dictate-terms-greek-government
3 comments:
This will definitely put a lot of pressure on the Greek banks, and the situation certainly won't be easy for them. It seems to be, as the article suggests, a means of putting pressure on the Greek government to cooperate with the plans the ECB has for them regarding austerity measures.
On the whole, the Eurozone is stable right now but not in a very good place regarding growth and unemployment figures for some of the economies. It remains to be seen what the outcome of this new move is, but it may eventually force the new government into accepting the austerity measures, despite their wishes to not do so.
While the ECB can force Greece out with the euro by withdrawing ELA support, this would greatly damage the ECB's effort to raise inflation and allow the ECB to be blamed for breaking the euro zone apart after pledging to "do whatever it takes" to keep it together. My guess is Greece technically defaults but stays in the euro. Cutting ELA support would be a lose-lose for the ECB and Greece.
While the ECB can force Greece out with the euro by withdrawing ELA support, this would greatly damage the ECB's effort to raise inflation and allow the ECB to be blamed for breaking the euro zone apart after pledging to "do whatever it takes" to keep it together. My guess is Greece technically defaults but stays in the euro. Cutting ELA support would be a lose-lose for the ECB and Greece.
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