Bank funding powers make Greece vulnerable to ECB pressure

By Paul Carrel & John O'Donnell

The European Central Bank's control over emergency funding for banks gives it the power to prod countries into the kind of aid-and-reform programme that Greece is desperate to escape.

The ECB is loath to pull the plug on Greece's banks, a scenario that would almost certainly lead to the country's exit from the euro zone. But if Athens refuses to extend the existing programme or sign up to a new one it may have little choice.

Time is short, and the ECB has Greece on a tight leash.

On Thursday, the ECB raised the Emergency Liquidity Assistance (ELA) available to Greek banks by about 5 billion euros ($5.7 billion) to 65 billion, extending the funding until Wednesday, when it will reassess the situation.

The ECB has already stopped accepting Greek bonds in return for funding, shifting the financing burden onto Greece's central bank. However, the ECB retains control over that ELA funding, which is subject to tight conditions.

"If the Greek government says 'we are not paying our debts', then the banks are actually insolvent, because they hold a lot of Greek sovereign bonds,» said Volker Wieland, a member of the German government's Council of Economic Experts.

The rules governing ELA stipulate that the euro zone's national central banks can only grant such funding temporarily, and to solvent banks.

Denying Greek banks this funding «would be a way to bring Greece to an agreement quickly,» said Wieland.

Clock ticking

This is a tactic the ECB has used before.

In March 2013, with Cyprus unwilling to accept the conditions for unlocking EU aid, the ECB set it a tight deadline to agree a bailout plan, threatening to cut off ELA funding to its banks. That quickly brought...