Why has the ECB punished Greece?

The most immediate and serious consequence of the European Central Bank's (ECB) decision to refuse to lend to Greek banks against the security of Greek government bonds is that it is very difficult to see how any bank over there can provide a cent of new credit to even the most deserving borrowers.

Which means that if the Greek economy was growing yesterday - which it might have been, on the basis of recent statistics - it won't be any longer.

Why would it be impossible for Greek banks to create credit and make loans?

Well their savers and depositors are withdrawing billions of euros every week at the moment, according to banking sources (which is the consequence of fears of Greek exit from the euro, which would see deposits turned into less valuable new drachmas) - so that is one important squeeze on their ability to lend.

And although they are in a position to pledge assets (types of loan) to the ECB other than Greek government bonds to raise money, sources indicate that they have pledged most, if not all, of their eligible assets.

Worse than that, as and when their existing borrowings from the ECB mature, which they do on a daily basis, they now have to find security other than Greek government bonds to replace the ineligible Greek government bonds.

But you may point out that it is still permissible for Greek banks to borrow from the Bank of Greece, under arrangements for the provision of Emergency Liquidity Assistance or ELA - albeit at a higher interest rate than the almost zero charged by the ECB.

Well that is so. Except that there is thought to be a limit imposed by the ECB - perhaps of up to €60bn, according to Die Welt - on the amount of ELA that can be provided by the Bank of Greece.

Credit crunch

Now €60bn may seem a lot of headroom. But it has to be measured against total loans and investments of Greek banks, that have to be funded by deposits or central bank loans, that are not far off €400bn. And more than €60bn of this €400bn is already being funded by the ECB (according to Morgan Stanley).

So at the rate of deposit outflow being suffered by Greek banks, and combined with the ECB wanting its money back, €60bn of headroom would probably be used up in weeks.

Among many big outstanding questions is whether the ECB would allow the Bank of Greece to lend more than €60bn as and when that ceiling is about to be hit.

In the absence of any certainty, banks can't know whether they are about to run out of money - so all they can do to prevent themselves falling over is to sell anything that isn't nailed to the floor and cease lending.

In other words, if there wasn't a severe credit crunch in Greece in the run up to the general election and subsequently, there certainly is now.

Or to put it another way, the ECB will be seen in Greece to have punished Greek people for daring to vote for an alternative to eurozone economic orthodoxy.

And whether that will make it easier or harder for Syriza to reach an entente with Germany and the rest of the eurozone, that would avoid Greek exit from the euro, is moot.