By Balazs Koranyi and John O’Donnell
The European Central Bank raised its emergency funding for Greek banks slightly on Thursday in a step to help banks partially reopen after euro zone governments agreed in principle to grant Athens a new three-year loan.
ECB President Mario Draghi said the bank’s governing council had increased emergency liquidity assistance by 900 million euros for one week at the request of the Bank of Greece.
“Liquidity provision according to our rules was never meant to be unlimited and unconditional,” he told a news conference, saying the Eurosystem of central banks’ total exposure to Greece had risen to 130 billion euros ($141.32 billion).
Draghi said it was hard to predict when capital controls imposed on June 29 after the breakdown of bailout negotiations could be lifted, but it was important to avoid a run on the banks.
Rebutting criticism in Greece that the ECB had starved Greeks of cash, he noted that the biggest deposit flight had coincided with political events such as the January election and the collapse of bailout talks in June.
“So I find these observations that there wasn’t enough liquidity assistance or that there was a bank run caused by the ECB quite unwarranted, certainly unfounded,” he added.
Draghi said the ECB had always acted on the assumption that Greece would remain a member of the 19-nation currency area, but that depended entirely on the Greek authorities and other member states, not on the central bank.
Earlier, the ECB held interest rates steady and Draghi said the central bank would fully implement its quantitative easing government bond-buying programme up to September 2016 to support a broadening economic recovery and help the euro area return to its inflation target of just below 2 percent.
He promised more action if needed.
Before agreeing to raise ELA, the bank needed to ensure that Greece will have the temporary financing to repay a 3.5 billion euro plus interest payment due to the ECB on Monday.
Draghi said all evidence indicated that Greece would make that July 20 payment and clear its arrears to the International Monetary Fund.
A temporary 7 billion euro ($7.64 billion) EU loan has been agreed in principle but technical details will take until Friday to iron out, euro zone officials said.
Draghi said the ELA increase granted was fully in line with the extra liquidity requested by the Greek central bank.
Draghi said the Greek crisis had shown up the fragility of the euro zone and the need for stronger integration within the bloc.
“This union is imperfect, and being imperfect is fragile, vulnerable and doesn’t deliver … deliver all the benefits that it could if it were to be completed. The future now should see decisive steps on further integration,” he said.
After the ELA increase, Greek banks are likely to open only with reduced operations and cash withdrawal limits at least until a bailout package is passed and banks receive at least some of the 25 billion euros earmarked for recapitalisation.
ELA has been held steady since late June, forcing banks to close and limiting cash withdrawals to 60 euros per day, disrupting an economy already in recession. It has shrunk by a quarter since the start of the country’s troubles.
Still, a limited bank opening would create the impression of normality and allow the Greek central bank to release cash that one official said was now held in its vaults for an emergency, via the banks into the economy.
Nearly a third of economists polled by Reuters still expect Greece to eventually leave the euro and the International Monetary Fund said Athens needs far more debt relief than European governments have been willing to contemplate.
Though Germany ruled out a ‘haircut’ to this debt mountain within the euro zone, it said extending maturities was an option and the European Commission suggested ‘very substantial re-profiling’. The IMF said Greece may need a 30-year grace period on servicing all its European debt, including new loans, and a dramatic maturity extension.