European Central Bank secretly distributes infinite money

Submitted by cpowell on Tue, 2012-05-22 14:15. Section: Daily Dispatches

10:10a ET Tuesday, May 22, 2012

Dear Friend of GATA and Gold:

The Financial Times reports (see below) that the European Central Bank has secretly distributed E100 billion to Greek banks and billions more in secret to other European banks and, in doing so, has gained great "sway over eurozone politicians" -- you know, the people actually elected to run their countries.

Infinite secret money is infinite secret power, and it's great that the FT is interested in this aspect of central bank secrecy. Is it too much to hope that the FT someday will show similar interest in the secrecy imposed by central banks on their interventions in the gold market, interventions detailed by GATA here?:

http://www.gata.org/taxonomy/term/21

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Secret E100 Billion in Aid Props Up Greek Banks

By Ralph Atkins
Financial Times, London
Monday, May 21, 2012

http://www.ft.com/intl/cms/s/0/a7087224-a360-11e1-ab98-00144feabdc0.html

There has been no official announcement. No terms or conditions have been disclosed. But Greece's banking system is being propped up by an estimated E100 billion or so of emergency liquidity provided by the country's central bank -- approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.

Extensive use of "emergency liquidity assistance" (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis. Separate from normal supplies of liquidity and meant originally as a temporary facility for national authorities to use when banks hit problems, ELA proved a lifesaver for the financial system Ireland and is now even more so in Greece. As such, it has given the ECB -- which has ultimate control over the facility -- considerable power to determine countries' fates.

Whether that power would ever be exercised is unclear. ELA is a subject on which the ECB is deeply reluctant to provide information -- even on where or when it is provided.

"You don't say when you are in an emergency situation, because then you make the situation worse. So I really don't see the usefulness of being more transparent," Luc Coene, Belgium's central bank governor, explained in a Financial Times interview this month.

The ECB's guard slipped a little late last month. Its weekly financial statement published on April 24, showed an unexpected E121 billion increase in the innocently titled heading "other claims on euro-area credit institutions," the result of putting all ELA under the same item. By definition, E121 billion was the minimum amount of ELA being provided by the "eurosystem" -- the network of eurozone central banks.

By scouring ECB and national central bank statements, analysts have since pieced together more details. Analysts at Barclays, for instance, reckon Greece is now using E96 billion in ELA, with Ireland accounting for another E41 billion and Cyprus E4 billion. If correct, total ELA in use has exceeded E140 billion -- more than 10 per cent of the amount lent to eurozone banks in standard monetary policy operations.

Because of the risks of extra liquidity creating inflation, ELA in excess of €500m requires approval by the ECB's 23-strong governing council: its use can be stopped if two-thirds of the council oppose an application.

Importantly, the risks fall on the relevant national central bank, rather than being shared across eurozone central banks as with normal liquidity -- although there would be a general hit if a country left the eurozone. However, there is no theoretical limit to the amount of ELA that can be provided -- and no information, for instance, what collateral recipient banks have to provide as security or what interest rate they pay. Ireland's example shows that the supposedly temporary use of ELA, can also be prolonged.

Mr Coene said ELA had to be cut off once banks became insolvent. "It is emergency liquidity assistance -- not solvency assistance," he said. The secrecy surrounding ELA creates grey areas, however.

Last week the ECB council excluded four Greek banks from ordinary liquidity operations -- forcing them to fall back on ELA. The unofficial reason was political uncertainty over Greece's bank recapitalisation plan after the country’s inconclusive May 6 election.

But where would the council draw the line? Mario Draghi, ECB president, would probably seek political cover before Greek ELA was withdrawn. Although the ECB's "strong preference" was for Greece to stay in the eurozone, the country's future was for politicians to decide, he said last week.

"Cutting off ELA would be the way to push Greece out of the eurozone -- if that was wanted, or if Greece really wanted to leave. But I don't think the ECB is going to take that decision," said Laurent Fransolet, Barclays analyst. "I think the ECB would go to the political powers and have them take the decision."

Nevertheless, ambiguity over how the ECB would really act gives it sway over eurozone politicians. An ECB threat in late 2010 to pull the plug helped persuade Ireland to accept an international bailout plan. No doubt, its governing council will hope to concentrate minds similarly in Athens.