Money Supply

Mario Draghi says the European Central Bank’s “strong preference” is for Greece to stay in the eurozone. No doubt that’s because of all the Greek bonds on its balance sheet, right?

The value of those bonds is probably the least of the ECB’s worries if Greece exits. The biggie would be handling the contagion.

The ECB does, however, have substantial holdings of Greek government bonds, along with other Greek assets, which in all likelihood would become worthless if Greece does leave.

How big are the holdings?

Mario Draghi flew direct from Wednesday night’s Brussels summit to Rome, where he gave a lecture in honour of Federico Caffè, a celebrated Keynesian economist under whom he studied.

His main message was the need for eurozone politicians to come up with a vision for the union’s future. But he also admitted that his university thesis was sceptical about the idea of a single currency area.

“The title was ‘towards the start of a single currency’ and the thesis was actually quite critical,” Mr Draghi recalled, according to Bloomberg. “See how things change in life,” he added.  Welcome transparency? Or a chink of self-doubt?

Did the Bundesbank last week try to stop life-saving emergency liquidity assistance for Greece’s banks? That would be a reasonable interpretation of noises from Germany’s central bank — and suggests a dangerous game is being played out in Frankfurt.

The Financial Times reported on Tuesday how at least some Greece banks are being kept alive by about €100bn in “emergency liquidity assistance”, a facility meant to be used only by banks in the direst of need. The massive demand followed the ECB’s decision to exclude four Greek banks from its regular liquidity providing operations because of uncertainty over their future financial strength.

As such, ELA is propping up the Greek banking system, allowing it to remain a member of the eurozone. But the word in Frankfurt is that the Bundesbank was not pleased. It thinks Greece should have pressed ahead much faster with the recapitalisation of its banking system, using €25bn in funds already made available by the European Financial Stability Facility. Too much of a burden is falling onto unelected central bankers, it fears.

Might the Bundesbank have gone so far as to vote against approving the Greek ELA — even if it would have tipped Greece into financial catastrophe? The Bundesbank is not saying, but the tone of recent comments by Jens Weidmann, president, suggests he would if Greek ELA were to rise further. “It’s true, I would not think it right if the eurosystem (the network of eurozone central banks) now increased again its risks vis-a-vis Greece,” he warned in a German Sunday newspaper.

As Mr Weidmann noted pointedly in the same interview, a two-thirds majority is required on the ECB’s governing council to block approval of ELA. That makes it harder for the Bundesbank to gather the necessary degree of support, and might have dissuaded it from pressing the matter last week. But Athens has been served notice.