Madcap Money Printing: How Will The ECB Extinguish ELA Euros Printed By The Greek National Bank?


Adios, Toxic Trash Debt from the Hellenic Province

The ECB continues to play the role of “bad cop” in the current back and forth between the Syriza-led government of Greece and the EU. The latest salvo entailed the ECB suddenly rescinding the waiver that made junk-rated Greek debt eligible for refinancing operations with the central bank. Here is the wording of its statement:


Eligibility of Greek bonds used as collateral in euro system monetary policy operations

The Governing Council of the European Central Bank (ECB) today decided to lift the waiver affecting marketable debt instruments issued or fully guaranteed by the Hellenic Republic. The waiver allowed these instruments to be used in euro system monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements. The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the program review and is in line with existing euro system rules.

This decision does not bear consequences for the counterparty status of Greek financial institutions in monetary policy operations. Liquidity needs of euro system counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing euro system rules.

The instruments in question will cease to be eligible as collateral as of the maturity of the current main refinancing operation (11 February 2015).


(emphasis added



Photo credit: Jonas de Ruytter


This means that by February 11, the ECB will have removed all junk-rated Greek debt from its balance sheet. However, for the moment this will make no difference to the Greek banking system in practice, as the Bank of Greece can still extend “ELA”, i.e., emergency liquidity assistance. So this is essentially just a warning shot.


The ELA Conundrum

What is ELA precisely? Generous use of this instrument was first made in Ireland, when the sovereign debt and banking crisis crashed ashore there many moons ago. Essentially, it is nearly “pure” money printing. In an ELA operation, a national central bank (which n.b. is part of the euro system) receives IOUs from de facto insolvent banks, and electronically “prints” the euros the banks require

As an aside, this may also involve some physical printing of euro banknotes in the event of a bank run, to the extent that withdrawals of cash currency occur beyond the capacity of the banks to satisfy them. We can probably expect the low level bank run that is already underway in Greece to intensify as a result of the above decision, because this is basically the second-to-last step before Greece is cut off from the euro system altogether.

However, let us think about this for a moment. The ECB will no longer bear the risk posed by Greek collateral of dubious value on its balance sheet, but the money substitutes it extended previously for this collateral will now be extended by the Bank of Greece (BoG) for something even less valuable, namely IOUs issued directly by the banks. In theory, the banks are obliged to eventually return the liquidity and buy their IOUs back. However, in practice, the Greek banking system is tottering on the brink, in spite of having been recapitalized. It has at least some €80 billion in NPLs (including those of foreign subsidiaries), with more than 30% of all outstanding loans in Greece non-performing at this point in time. Note that the projections for the 2015-2017 period on the chart below are estimates based on “things continue as planned” scenarios.


091813_greece_figure1Greek banking system, NPL ratios.


Greek banks have increased their capital by €8.3 billion ahead of the ECB’s “comprehensive assessment” and were deemed to be largely in compliance with European capital adequacy rules as a result. However, the fact that they need an eligibility waiver for their collateral in order to engage in repo transactions with the ECB and the fact that some €80 billion (more likely actually €90 billion by now, as the figure is a bit dated) of their outstanding loans are duds, tells us that they are definitely in no condition to survive a bank run on their own. In fact, it tells us that these allegedly “healthy” banks can only be considered healthy by some kind of legerdemain.

So the BoG is now going to print up the money the banks need. However, one wonders what will actually happen if/when the ECB rescinds ELA permission as well, after the deadline for the troika program negotiations passes. Will the BoG tell its banks “sorry, you’re all bankrupt now, we need to take all the money back”?

We somehow doubt it will – and to the extent that Greek citizens are transferring money to banks elsewhere in the euro area or are withdrawing it in the form of cash, the money will simply continue to exist, no matter what anyone does or says.

There is anyway not exactly a money shortage in the euro area at present – even before the ECB begins with its mad-cap “QE” program in March, true money supply growth in the euro area has begun to soar – presumably due to the covered bond and ABS purchase programs.


euro area-M1 plus growth rate-ann“Deflation”, euro area style: year-on-year true money supply growth has soared to almost 10% – click to enlarge.


Greece “Could Go Bankrupt”

Meanwhile, in the political arena, we note with some amusement that European parliament president Martin Schulz just remarked that the Greek government risks going bankrupt unless it agrees to play by the troika’s rules. Say what?

As far as we know, Greece has been bankrupt since about 2009-2010. Considering the above, not only the Greek government, but also the Greek banking system and 30% of its remaining private sector are bankrupt, so it is no exaggeration to state that the entire country is bankrupt.

This fact has also been recognized by Yanis Varoufakis, the new finance minister of Greece, who stated in an interview with German newspaper Die Zeit:


“Greece collapsed under its debts. How did we deal with that? We gave even more loans to an over-indebted state. Imagine one of your friends loses his job and can no longer pay his mortgage. Would you give him another loan so he can make payments on his house? That cannot work. I’m the finance minister of a bankrupt country!”


(emphasis added)

Obviously, we fully agree with this blunt assessment. Alas, as previously discussed, the EU simply cannot let Greece get away with being bankrupt and officially acknowledging that it is in this deplorable state. It can only allow it to continue to muddle on and pretend that it is not bankrupt, in which case Greek banks can also continue to pretend that they are “healthy”. The absurd charade must go on.



It seems to us that things are soon going to get even more “interesting”. After all, the Greek government continues to insist that the February 28 deadline will be ignored by it and that it refuses to enter into negotiations with the troika under the existing bailout program. This in turn means that the ECB shouldn’t allow ELA to proceed beyond that date either.

So we are wondering, what if the Bank of Greece simply says “we’re going to extend it anyway”? How is the system going to be able to differentiate between euros created ex nihilo in Greece and euros created by the same method elsewhere? And what about all the euro denominated funds flowing out of Greece in the meantime? Obviously, if Greece were to be kicked out or leave the euro area voluntarily, these funds would not magically “disappear”.

As we already noted, the entertainment value of the Greek government, indeed of the entire country, has vastly increased and it appears it may increase yet further. Stay tuned.


Charts by: ECB,