The European Central Bank’s Governing Council will meet on Wednesday to discuss whether to raise the collateral requirements for the emergency loans it gives to the Bank of Greece.
The 25-member council, led by ECB President Mario Draghi, is set to meet in Frankfurt to decide whether to tighten the rules for the Emergency Liquidity Assistance, or ELA, for Greece.
However, analysts expect ECB policymakers not to any take decision that could trigger a crisis. That said, pressure is mounting on the bank to get tough with Greece as the country veers towards a default amid the ongoing political crisis.
Under the ELA scheme, the Bank of Greece uses the funds it borrows from the ECB to provide loans to the country’s solvent banks. The risk of lending lies with the Greek central bank and the loans under the scheme are costlier for banks.
The ECB reviews the ELA weekly and reports suggest that policymakers may decide that to raise the so-called haircuts on collateral for ELA. The move can be passed with a two-third majority within the policy-making body.
The haircut implies the reduction made in the value of collateral assets while allotting a loan. The ratio, which is not made public, was lowered last year. An increase in the haircut will reduce the amount of emergency funding that banks will receive in return for the security they offer as collateral.
Currently, the ceiling on the emergency lending to Greek banks stands at EUR 80 bilion, after several weekly increases by the ECB. The maximum this can be stretched is till EUR 95 billion under the existing rules. That could be reduced if haircuts are raised.
While the Greek government and the EU officials hint of gradual progress being made towards reaching a deal to release more aid to Greece, the lack of clarity about the situation and concerns about an imminent default is keeping markets on the edge.
Focus will be on the European Union leaders meeting set to begin in Riga, Latvia on May 21, though there is unlikely to be any announcement of a deal.
Elsewhere on Wednesday, reports cited a Greek official as saying that the government may not be able to make a payment due to the International Monetary Fund on June 5 unless an agreement is reached with creditors.
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