Martin Hellwig argues in the Handelsblatt that the ECB should not cut Emergency Liquidity Assistance (ELA) to the Greek central bank. He makes the following points:
- In 2010, the ECB pressured Ireland to guarantee bank liabilities (vis-a-vis other European banks) by threatening to cut ELA. Such blackmailing is inconsistent with the ECB’s task to safeguard cash and payment systems.
- The same applies to Greece now. As lender of last resort, the ECB should provide funding to Greek banks even (or exactly) when they don’t have access to markets, as long as they are solvent. In principle, the banks may use central bank funding for whatever purpose they see fit; right now, however, the ECB has put restrictions on Greek banks’ purchases of Greek government bonds.
- Are the Greek banks solvent? There are certainly liquidity problems, due to heavy withdrawals triggered by fears that the Greek government may convert Euro into Drachma denominated deposits. Solvency problems are only very recent, due to the economic malaise.
At this point Hellwig stops arguing based on the European treaties.
- Instead, he suggests that the solvency rule could be waived in situations like currently in Greece or in Germany in 1931.
- He concedes that a freezing of ELA could be considered a precautionary measure against Grexit—an event that is not anticipated in the European treaties.
- But it could also be considered a measure that forces Greece into economic turmoil; the Greek banks into insolvency; and Greece out of the Euro area against its will.