ECB holds key to Greek developments

 Frankfurt can control the flow of cash in the domestic credit system and therefore the state?s liquidity

By Dimitris Kontogiannis

Greece is preparing to go to the polls next Sunday with the two larger political parties sharpening their exchanges and making more promises in a bid to boost their election chances. Regardless of who wins and forms a government next week, the key to economic developments in the next few weeks, and perhaps months, is held by the European Central Bank (ECB) ? and even more so if the new government is led by the leftist SYRIZA party.

Greece has been unable to collect a total of about 7.3 billion euros from bailout loans and revenue from Greek bonds held by the ECB because the last review of the economic policy program was not successfully concluded on time. Nevertheless, the state has managed to operate smoothly for months because it has tapped domestic liquidity sources.

Indeed, the state has been kept afloat by intra-governmental borrowing through repo (repurchase agreements) operations to the tune of 9 billion euros according to government sources. The central administration uses state assets as collateral to draw on this excess liquidity from general government subsectors, i.e. social security funds, state organizations etc, which amounted to about 13 billion euros last September.

If the repayment of this borrowing is rolled over, this repo framework will become an actual funding source in 2015-2016. The central administration could also use idle cash resources deposited in local commercial banks by the same or other parts of the general government for liquidity purposes. The exact amount of these cash resources has not been made public. When asked, one official put it a 2 billion euros, while another spoke of ...

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