ECB gives Greece a little breathing room but remains cautious

As expected, most of the Q&A session was spent on the fallout from Greece. Mr Draghi tried to convince his audience that the ECB was not responsible for the deterioration of the Greek banking sector and remained cautious about the bailout plan and possible QE.

President Draghi announced the decision to raise ELA to Greek banks by €0.9bn (reportedly bringing the facility to €89.9bn). This decision will be revised in one week and may be sufficient for Greek banks to reopen next week. Mr Draghi justified the decision by saying that the quality of Greek banks' collateral has improved thanks to several recent developments: the Eurogroup announcement of the start of the negotiation process for a third bailout, the different successful parliament votes (starting by Greece), the release of a bridge loan... He failed to convince us when he added that Greek banks might be solvent on current basic core equity measures, but could lack collateral (the official reason for which the ECB didn't raise ELA over the past two weeks). He suggested that capital controls (a Greek government responsibility) were a good decision that preserved the interests of Greek depositors by preventing a bank run.

Mr Draghi stressed that the ECB acts within its mandate, i.e. the ECB works on the assumption that Greece is and will remain a member of the euro and that Grexit is a political choice. He indicated that the ESCB exposure to the Greek banking system currently stands at €130bn, a larger amount that the deposits of the domestic private sector.

Asked about the lack of transparency about ELA (no statement by the ECB on specific amounts, only press leaks), Mr Draghi indicated that the ECB will change its communication policy when the issues are systemic or macroeconomic. The absence of a statement is justified when one individual bank is concerned. When a national banking sector is provided with ELA funding, the ECB will make the information public.

Regarding the negotiations on a third bailout, Mr Draghi said both the ECB and the IMF will be repaid on 20 July. He reiterated that Greece needs a plan that includes structural reforms, promotes growth and social fairness, is fiscally sustainable, and addresses financing stability (including €25bn earmarked to recapitalize the banking sector). He said that some form of debt relief is necessary and uncontroversial. Yet, he did not give any hint at his preferred form of debt relief. The 13 July agreement stresses that nominal haircuts are impossible, whereas the IMF made it clear that a haircut or a fiscal transfer is required.

Regarding QE purchases of Greek bonds, he indicated that there would be "some room" after the 20 July SMP repayment, as ECB holdings would be lower than 33% of Greek debt. Yet, his tone was cautious. Indeed, the conditions attached to the deal suggest this is not a near-term prospect.