Last Monday the President of the European Central Bank, Mario Draghi reacted strongly while answering a MEP’s question in the European legislature. He was asked if the ECB is “blackmailing” and financially “suffocating” Greece. As expected, he denied the accusations. Was he right though? Rather not. Only some hours afterwards the central bank ordered the country’s four systemic lenders not to buy any more government bills, thus straining Athens from its last available financial sourcing. The order was issued by the newly created branch of ECB, the Single Supervisory Mechanism – SSM, the new system of banking supervision for Eurozone.
Unfortunately for Draghi, within hours the deeds confirmed the accusations. Greece hasn’t received any financial aid after July 2014 and since then she services its huge debts using only proper means, scratching the bottom of the barrel and employing even the reserves of the pension funds. Just this month Athens paid back €1.2 billion to IMF and €360 million in interests to Germany.
This is so far as Greece can go though and next month’s obligations cannot be served without financial support from its creditors; that is the EU, the ECB and the IMF. In this respect this is the crucial week. Greek Prime Minister’s visit to Berlin last Monday and Tuesday clarified that the country has to come up with a convincing package of financial measures and structural reforms during this week. A delegation under Alexis Tsipras had exhaustive discussions with Angela Merkel’s staff on this issue in the German Chancellery. The conclusion was that the Eurogroup, that is the 19 ministers for Finance of Eurozone, are the ultimate judges if Greece can convincingly schedule a growth and stability policy mix. Only then Greece will receive any additional credit in order to repay its maturing debts.
As if nothing had changed
While the European political rhetoric is decorated with beautiful words like ‘trust’ and ‘solidarity’, the real job to ‘convince’ the new Greek government that there is no other way than following Eurozone’s austerity rules, is secured by the ECB. Tsipras and his left wing SYRIZA party won the 25 January election on a populist program, repudiating austerity and the unpopular structural reforms like the privatizations of public utilities. However, now that the Athens government chooses to stay in the Eurozone, it is finding it now impossible not to follow the general Eurozone policy lines of fiscal orthodoxy. But how can Tsipras be actually convinced to repudiate his pre-electoral rhetoric? At that point enters the ECB.
The central bank plays the key role in convincing Athens for all that. Understandably Tsipras and his companions would have resisted a lot more before starting complying with the Eurozone orthodoxy, but only if they could command the needed liquidity to keep the country afloat for a few more months. Unquestionably, staying in Eurozone is politically imperative for the government because more that 80% of Greeks want to continue using the euro. Then, with the return to the drachma out of question, the ECB undertook the role of practically ‘convincing’ or rather forcing Athens to comply with the euro area rules. And there was no better way to do that than the financial strain. How is this done?
The ECB controls it all
For one thing the central bank can ordain the way the country’s four systemic lenders act. Traditionally those four banks have been the major source of liquidity for the government, through their purchases of state bonds and bills. This had to be blocked, if Greece was to be effectively ‘blackmailed’ and financially suffocated. So this Tuesday, in order to accomplish the encirclement, the ECB legally blocked the four Greek systemic banks from purchasing more state debt paper, thus cutting off the last source of extra cash available to the Tsipras administration. Somebody in the ECB must have thought that the Greek politicians do not understand any other language than the iron rein on finance. This is exactly what the ECB did, to make Tsipras and his companions more susceptible to Eurozone’s political determinants.
In detail now, according to well informed ECB sources the central bank this week changed a recommendation into a legally binding tenet forbidding the Greek banks from financing the Athens government through purchases of more public debt paper. Reportedly, the reason for was that one of the four systemic banks disregarded the initial simple recommendation of ECB’s Single Supervisory Mechanism, and kept refinancing the government. So this had to be blocked if the financial horizon of Athens was to be restricted to just some weeks.
Ireland and Cyprus paid the price too
It was exactly the same frame as in the case of Ireland and Cyprus. At the end of 2010 the Irish government was ‘convinced’ by the ECB, under the threat of a disorderly bankruptcy, to undertake the huge toxic debt of the country’s major private banks and thus burden the taxpayers with its servicing. The cost of it to the Irish people came to almost one annual GDP. Only in this way the ECB could safeguard the imprudent exposure of French and the German banks to the reckless Irish lenders. As a result the Irish public debt from 20% of GDP in 2008 reached 120% last year. A similar arrangement was followed in Cyprus, but in this case it was primarily the shareholders, the lenders and the depositors of the two major banks who bore the largest part of the cost.
All in all the Eurozone may aspire of becoming a political union in the not so distant future, but with such a strategy and ruthless practice followed by the ECB when it comes to the smaller members states, the project will be derailed.