Political Fears May Keep ECB Easing On Hold

In a post this past week noting that Greece Continues to Run Up Liabilities at the ECB, I mentioned:

Although the ECB cannot run out of Euros (go bankrupt), incurring actual losses blurs the line between monetary and fiscal policy. This result [a Grexit], which seems increasingly probable, will likely hinder support for further expansions of the ECB’s balance sheet.

Yesterday FT Alphaville ran a more expansive post On the ECB’s attempts to ring-fence its balance sheet, quoting a note from Standard Chartered analysts Thomas Costerg and Sarah Hewin:

It is worth noting that a key feature of the TARGET2 mechanism is that while liquidity flows from the north to the periphery, the collateral remains with the peripheral NCB – it is not transferred to the north. In theory, should a peripheral bank default on its repayment obligation to the ECB, the ECB would require the collateral from the NCB. However, it remains to be seen whether, in the fluid circumstances of a Greek exit, the NCB would indeed pass on the collateral; furthermore, the value of the collateral could have diminished significantly, potentially to a fraction of its original value (for instance, if it were a Greek government bond). As a result, in many circumstances, the collateral pledge would not entirely offset the loss of ECB funds.

Also from the post

Here’s a chart that shows the ECB funding to the periphery and marginal increase from ELA lending recently (via StanChart):

So apart from running up liabilities at the ECB, Greece also gets to retain the collateral at its own National Central Bank (NCB). This suggests that as time continues to pass, the Greek bargaining position should become even stronger. The ECB, similar to most other “independent” central banks, will not want to venture into the political realm by accepting losses that amount to de-facto fiscal policy. This fear may force the ECB to be more cautious in its actions, even as troubles appear to be rising in the periphery banking and sovereign sectors. With the Fed also potentially on hold due to political hesitations, markets may find they have farther to fall this time around before central banks are willing to intervene. The big question is, will central banks intervene in a timely enough fashion and with sufficient force to prevent another round of bank runs similar to 2008-2009?