The fact that the Greek politicians continue to look so relaxed has a simple explanation: they’ve long had the ECB in their corner. Observers say the Greek leaders are playing a calculated game in talks with creditors.
According to the Cologne-based economist Max Otte, the Greeks are playing a very calculated game. "The longer they poker, the more money the European Central Bank has to transfer," he said. He's referring to the emergency loan that the Greek Central Bank is giving to domestic banks with permission of the ECB to keep them going. In other words: the Bank of Greece is itself printing the bank notes for the Greek banks, which would otherwise have no more access to further money.
This emergency credit, also known as Emergency Liquidity Assistance, was aptly described by Greek Finance Minister Yanis Varoufakis before he was a member of his country's government: "The ELA system just allows bankrupt banks that a bankrupt treasury doesn' want to save, to borrow money from the Bank of Greece against securities that aren't worth very much."
Without emergency credit, Greek banks are bankrupt
The facts on which Varoufakis' analysis is based have not changed. On the contrary, since Syriza has governed the country, the banks are suffering even more under the withdrawal of capital. Month after month, Greeks are withdrawing millions from their accounts. When banks have a liquidity crunch over a longer period of time, they are actually bankrupt. But insolvent banks are not allowed to receive emergency credit. Elke König, chair of the EU banking union's Single Resolution Board, has accused the ECB of indirectly delaying the bankruptcy. "There's a fine line between the ELA and delayed bankruptcy," she said.
German Central Bank President Jens Weidmann is also critical of the fact that the ECB has expanded the limit on ELA credits almost weekly to reach a current level of 83 billion euros. According to Ifo President Hans-Werner Sinn, the Greek Central Bank only has liability of 41 billion. "Mario Draghi is usurping this power," said Otte in an interview with Deutsche Welle. "And where there's no plaintiff, there's no judge. Who stands above the ECB? It's certainly not the German parliament."
Effects of ELA credit
It's also interesting to see what happens with the emergency credit. Athens will first make the loan repayments that are due. That will protect the Greek government from insolvency - a kind of indirect public financing, and something that according to the ECB's statutes is absolutely not permitted. Secondly, it will fill the gaps created by the withdrawal of capital from the banks. Sinn says private loans will also be financed. "The Greeks have printed an additional 115 billion euros beyond the normal requirement, and are loaning this via the banks to the private economy," he said.
In this way, private money is exchanged for public capital. The money will be taken out of the country or hidden. "In the case of an exit, this money belongs to them, they've already made sure of that. They would then no longer be subject to the demands of the euro system," said Sinn.
Good deal for Greece
From the Greek perspective, it's a good deal. And the longer the negotiations drag on, the more the emergency loans accumulate and the bigger the risk of losses become for the other euro countries. That's why Otte recommends pulling the brake now and letting Greece out of the euro zone. The EU would then have to loan the Greeks the emergency credit it needs to import the essentials, "but this emergency credit would be just a tenth or a fiftieth of the money that we're giving them now," said Otte.