The local banking system is about to get a desperately needed injection of about 20 billion euros as the European Central Bank will upgrade the collateral local lenders have supplied to draw liquidity. The ECB decision comes a few days after the completion of the Greek debt swap and upgrades to the country’s credit rating by two major agencies. Bank officials said on Friday that after the completion of the private sector involvement (PSI) plan and the diminishing of the default risk, the ECB has decided to re-evaluate the data that local banks have submitted in order to improve cash flows. As a result, the change in the pricing of the state collaterals of 90 billion euros will release additional liquidity of about 18 to 20 billion euros. An additional 3 billion euros will be released as a result of the repricing of the treasury bills that had also been used as collateral.
Bank sources add that this is a particularly positive development and under certain circumstances one-fifth of the amount released, i.e. at least 4 billion euros, could be channeled to the market immediately so as to bolster its liquidity, too. The Bank of Greece appears more reserved, though. Sources from the country’s central bank referred on Friday to a technical shift that should not have a significant impact on liquidity, given the major dependence that local banks have on the Eurosystem. At the end of 2011 domestic lenders had drawn some 120 billion euros from the ECB and the Emergency Liquidity Assistance (ELA), which served to secure the stability of the country’s credit system despite the particularly difficult conditions.
The industry highlights the importance of having part of the cash that was withdrawn in the last couple of years returned to the banks. Estimates suggest that about one-third of the 20-25 billion euros withdrawn in that period is being held in cash in homes around the country. Should part of this return to the country’s credit system, banks will get a much-needed lifeline, which can then be channeled back to the market to revitalize it.