The politics behind the ECB’s threat to cut Greece funding

In an article published Tuesday, Bloomberg argues that the European Central Bank is threatening to choke off funding to Greece’s lenders in the hope it won’t actually need to.

Under President Mario Draghi, the Frankfurt-based ECB has made its position clear: No program means no guarantee of cash from us.

Draghi is reprising an ECB tactic honed in the Irish and Cypriot stages of Europe’s debt crisis, where the prospect of vanishing central-bank funds helped prod politicians into action. Amid anti-austerity promises by the Syriza party, which leads in polls, the ECB is signaling a willingness to withdraw 30 billion euros of finance even if it tips Greece into a crisis that ultimately sees it leave the single currency.

However, with Samaras now ‘personally guaranteeing’ that there will be no more cuts in pensions, salaries and that he will ‘gradually reduce taxes’ starting now, a Samaras government will also take Greece out of the programme, something that does not appear to bother Mr Draghi. and poses the question: Is the ECB going to tolerate Samaras taking the county out of the programme for political reasons, or do they know Samaras is lying?

But while the threat of turning off the cash supplies to Greek banks is bandied around, it would be remarkable if such a step were actually taken, said James Nixon, chief European economist at Oxford Economics Ltd. in London. “The negotiation starts off with the threat of mutually assured destruction. But to actually withdraw funding from Greek banks is the sort of thing that would mean Greece is well on the road to exiting the euro.”

The German Belief, as  expressed by Michael Hüther, head of the Cologne Institute for Economic Research. is that  the knock-on effects of Grexit would be limited because of the “institutional progress such as the banking union which made Europe far less easily blackmailed than it was three years ago”.

In reality all that has changed since July 2012 is that the ECB has been allowed to act as a lender of last resort; or at least, markets believe so.Whether this belief would survive an expulsion of Greece from the euro is an open question.