ECB OKs Emergency Funding for Greek Banks

The European Central Bank Thursday raised its emergency lending to Greek banks by EUR900 million ($989 million), a move that could pave the way for the country's financial lenders to reopen. Announcing the decision in a news conference, ECB President Mario Draghi said it was a response to "several positive things that have happened" in Greece's negotiations with creditors on a third bailout program. European stocks extended gains after the ECB announcement. The Stoxx Europe 600 was 1.5% higher, having already rallied 1.3% earlier in the day. Earlier, the ECB kept its main rate, the rate at which it lends money to banks at its regular operations, at 0.05%, where it has been since last September. It kept a separate rate on commercial bank deposits that are parked with the ECB at minus 0.2%, meaning financial institutions have to pay to store surplus funds with the central bank. Mr. Draghi's announcement came as eurozone finance ministers released a statement welcoming the Greek parliament's vote earlier in the day to accept new austerity measures, and approving "in principle" a three-year, EUR86 billion ($94.5 billion) loan from the bloc's bailout fund. "Things have changed now," Mr. Draghi said. "We have accommodated the Bank of Greece's request." Greece's banks have been closed since June 29, a day after the ECB froze its Emergency Liquidity Assistance. Without access to funding from private investors or banks outside Greece, the Greek institutions have been running down their small cash piles since then, permitting ATM withdrawals of EUR60 a day. The lifting of the ELA freeze is unlikely to herald a quick return to normality for the banks. Limits on withdrawals are likely to persist for a period whose length will depend on how great is the pressure to pull out cash and how willing is the ECB to replace departing cash with emergency loans. A full lifting of the capital controls that prevent money from flooding out of Greece could take months or more, while credit to businesses and households is likely to remain severely restricted. The ECB has been widely criticized for its decision to freeze emergency lending to Greek banks, making it impossible for them to offset a steady flight of depositors. Critics say that the ECB's refusal to lift the amount of ELA above EUR89 billion has led to a significant loss of output across the Greek economy, inflicted long-term harm on its banks, and made it even more difficult for the government to repay its debts. "They in fact triggered the banking crisis," said Paul De Grauwe, a professor of economics at the London School of Economics. "They've failed in their duty to ensure financial stability." But Mr. Draghi rejected those criticisms, denying that the ECB had failed to provide liquidity when it was needed. "I find these observations that there wasn't enough assistance, or that there was a bank run that was caused by the ECB, quite unwarranted, unfounded," he said. A pressing issue for Greece is how it can obtain billions of euros in quick funds to pay the ECB EUR4.2 billion to redeem the bonds it holds, plus interest. On Wednesday, a top EU official proposed providing Greece with separate loans from an EU-wide bailout fund to pay its immediate bills. Mr. Draghi said members of the European Union are likely to approve that option. "All my evidence leads me to say we will be repaid, as well as the IMF (International Monetary Fund)." he said. "We know there is a financing concept that's been elaborated, and it's on its way to being approved." Mr. Draghi refused to be drawn into a discussion on whether suggestions that Greece might leave the eurozone had damaged the currency area, saying that the ECB had acted under the assumption that it would remain a member. But he did enter a heated debate over whether the new bailout program should be accompanied by a debt write-down for Greece. "It's uncontroversial that debt relief is necessary," he said. "We should focus on this point in the coming weeks." Despite the intense focus on Greece, its escalating crisis has shown little sign of upending the eurozone's modest economic recovery or undermining the ECB's stimulus efforts, which include cheap four-year loans to banks and a EUR60 billion a month bond buying program that was launched in March. Inflationary pressures are still weak with prices only 0.2% higher on the year in June, after 0.3% in May, well below the ECB's target near 2%. With inflation at such a low level, Mr. Draghi is expected to reiterate the need for the ECB to fully implement its broad-based bond buying program at least through to September 2016.