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New ECB cash lifeline could reopen Greek banks

Banks in Greece could open their doors on Monday for the first time in three weeks, after the European Central Bank boosted emergency funding for the country's financial sector by 900m (630m) and threw its weight behind calls for debt relief for Athens.

The ECB president, Mario Draghi, announced the extension of aid to the country's banks while backing the idea - championed by the International Monetary Fund but rejected by Germany - that some of Greece's debts will have to be written off.

"It's uncontroversial that debt relief is necessary and I think that nobody has ever disputed that. The issue is what is the best form of debt relief within our framework, within our legal institutional framework," said Draghi. "I think we should focus on this point in the coming weeks."

The ECB's decision to ease the plight of Greece's banking system came after the Greek prime minister, Alexis Tsipras, won a crucial parliamentary vote backing the spending cuts and economic reforms he has pledged to implement in exchange for opening talks on an 86bn bailout. The European commission, one of three creditors to Greece along with the IMF and the ECB, also announced it had put together a 7bn bridging loan for Athens.

As part of this short-term financing package, George Osborne has backed down over the use of the EU's bailout fund, the European Financial Stabilisation Mechanism, to finance Greece's short-term needs.

However, the chancellor said there would be an "impregnable ringfence" around the 850m of British money in the fund to prevent any losses to the UK taxpayer.

Speaking after the deal, Osborne said it was a "significant victory and strengthened the protections for the UK in the latest Greek bailout and any future bailouts of eurozone countries".

He added: "I said British taxpayers' money would not be on the line in any agreement and that's precisely what we have achieved."

In the event of a default by Greece, non-eurozone countries would be compensated using the profits made on holdings of Greek bonds by the ECB.

The the head of the Eurogroup of eurozone finance ministers, Jeroen Dijsselbloem, said the 7bn financing package was in place and inspectors from the IMF could fly to Athens as early as Monday to oversee implementation of the reform programme.

Tsipras had to rely on opposition support to pass the package of measures on Wednesday, amid angry scenes in parliament and violent clashes on the streets. He is expected to reshuffle his cabinet in the coming days, pushing aside Syriza members who rejected the deal.

Thirty-two of his own MPs voted against the plan, including the former finance minister Yanis Varoufakis, who has likened the bailout deal to the 1919 Treaty of Versailles that imposed crushing debts on Germany.

The interior minister, Nikos Voutsis, suggested elections could follow in the autumn as Tsipras seeks a mandate to press ahead with austerity measures.

Draghi said a majority of the central bank's governing council had voted in favour of the 900m increase in the ECB's Emergency Liquidity Assistance programme, which brings the institution's support for Greek banks to 130bn in total.

Giving a robust defence of the ECB's recent actions, Draghi denied it had precipitated the closure of Greek banks with its decision to freeze the funds available under the ELA after the announcement of a referendum on the austerity proposals demanded by creditors.

"We take this criticism very seriously, but I think it is unwarranted and unfounded to say that ECB actions started a bank run in Greece," Draghi said.

However, Paul De Grauwe, an expert on the eurozone at the London School of Economics, warned that by strictly limiting the funding available to the banks, the ECB risked exacerbating the run on deposits.

"The correct announcement of the ECB should be that it will provide all the necessary liquidity to the Greek banks. Such an announcement will pacify depositors," he said.

"The ECB has other objectives than stabilising the Greek banking system. These objectives are political. The ECB continues to put pressure on the Greek government to behave well."

Finland, one of the main sceptics of the Greek deal, gave its approval for negotiations to start on a new bailout and for talks on bridging finance. The finance minister, Alexander Stubb, said Finland would not accept a "haircut" on Greek debt but it was open to other options. He also said he was concerned about Greece implementing the reforms, given that Tsipras said on Wednesday night that he did not believe in them.

In Germany, which is due to vote on the bailout talks on Friday, an ally of the chancellor, Angela Merkel, called on the Bundestag to back the plan.

Horst Seehofer, the centre-right prime minister of Bavaria, said the Bundestag should vote to start formal talks with the Tsipras government on a bailout.

In an interview with Süddeutsche Zeitung, Seehofer welcomed the Greek parliament's decision to pass VAT and pension reforms to secure the deal, as a first step to winning back confidence. The Greek vote "is the beginning of trust building, which is urgently needed after the last few weeks and months".

However, doubts about Greece's place in the eurozone persist, with further signs that neither Athens nor its creditors believe the 86bn bailout can work.

Germany's finance minister, Wolfgang Schäuble, told German radio on Thursday that a temporary Greek exit from the eurozone could still be the best option.

[Source: By Heather Stewart, Rowena Mason and Phillip Inman, The Guardian, London, 16Jul15]

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