Art 127 of the Lisbon Treaty: the ECB is not allowed to cut of Greek liquidity

The ECB in its dealings with Greece was giving emergency liquidity assistance to the Greek banking system. Here is a typical ECB press release concerning this issue:

ELA to Greek banks maintained

6 July 2015

• Emergency liquidity assistance maintained at 26 June 2015 level
• Haircuts on collateral for ELA adjusted
• Governing Council closely monitoring situation in financial markets

The Governing Council of the European Central Bank decided today to maintain the provision of emergency liquidity assistance (ELA) to Greek banks at the level decided on 26 June 2015 after discussing a proposal from the Bank of Greece.

ELA can only be provided against sufficient collateral.

The financial situation of the Hellenic Republic has an impact on Greek banks since the collateral they use in ELA relies to a significant extent on government-linked assets.

One of the big questions is about collateral. I would argue that the Treaty of Lisbon contains a clause which should be interpreted as a lender of last resort clause. Article 127 says (my highlighting):

1. The primary objective of the European System of Central Banks (hereinafter referred to as “the ESCB”) shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.

2. The basic tasks to be carried out through the ESCB shall be:

– to define and implement the monetary policy of the Union,

– to conduct foreign-exchange operations consistent with the provisions of Article 219,

– to hold and manage the official foreign reserves of the Member States,

– to promote the smooth operation of payment systems.

I would argue that the promotion of smooth operation of payment systems, as a basic task, has to take priority over other concerns. That means, if the payment system in Greece only works if Greek sovereign bonds are seen as riskless collateral and the ECB can make it so (through QE or OMT or “whatever it takes”), then article 127 says it has to do that.

Blackmailing the Greek government/banks by threatening to withdraw liquidity support to me seems like a misreading of the primary objectives of the central bank. They way it was set up it was supposed to be independent from politics, and not an instrument to support Germany’s drive to impose austerity on countries that are in crisis. Whatever one thinks of central bank independence, but the political use of the emergency liquidity assistance would constitute a break with the spirit of the European System of Central Banks.