ECB raises ‘Haircut’ on Greek collateral, ratcheting up pressure on Greek banks

The Governing Council of the European Central Bank decided on Monday to maintain the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on 26 June 2015 after discussing a proposal from the Bank of Greece.

ELA can only be provided against sufficient collateral.

The financial situation of the Hellenic Republic has an impact on Greek banks since the collateral they use in ELA relies to a significant extent on government-linked assets.

In this context, the Governing Council decided on Monday to adjust the haircuts on collateral accepted by the Bank of Greece for ELA.

In essence, this means Greece would need to raise more assets to cover its borrowing, since an increased haircut means its collateral counts for less. The ECB confirmed  today that the adjustment is to be an increase.

It is expected that the adjustment will be raised to just off the 60% mark, the threshold beyond which a bail-in will become a serious possibility, to add on pressure on the Greek government to agree a cash for new austerity package.

Greek banks have watched their deposits slowly wither over the past several months, bringing the Greek financial system dangerously close to insolvency. The ECB reportedly has estimated that Greek banks could last until Wednesday under their current operating conditions.

Since last week, the Greek government has imposed capital controls on its banks, limiting the amount of money that can be withdrawn to a daily maximum of 60 euros. Originally set to expire on Monday, those limits were extended until Wednesday.

Greek representatives are to return to the negotiating table with other eurozone finance chiefs in an to reach an accord. An emergency eurozone summit is scheduled for today.