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ELA Does not Stand for Exaggeration, Lies and Assumptions

By Marc Chandler

ELA is the acronym for Emergency Liquidity Assistance. This is direct lending by the national central bank, with ECB authorization to local banks with more liberal collateral requirements. The national central bank is responsible/liable for the funds not the euro system.

Last week when the ECB announced that four Greek banks were no longer able to borrow from the ECB, this forced them to borrow from the Greek national central bank’s ELA facility. This in turn created confusion and all sorts of imaginary thinking.

Some have suggested that the ELA is a precursor to the issuance of Greece’s own currency. Whether Greece leaves the monetary union or not, the ELA is not the decisive element. This facility is not the beginning of a new Greek drachma or a Geuro or Gyro as some have suggested.

Nor is it secret like some in the media have suggested. Moreover, contrary to some impressions, the central bank of Greece is not the only euro area central bank that is drawing the ELA. Amounts more than 500 mln euros require ECB approval. A 2/3 majority can block or veto the use of the ELA. In addition to Greece, Ireland and Cyprus appear to be the other users currently, though it appears Belgium may have also drawn on it temporarily in dealing with Dexia.

The amounts involved seem quite modest. There is about 140 bln euros outstanding under ELA, of which two thirds is accounted for by Greece. However, part of what is happening in Greece is that the banks are in the process of being recapitalized under the second aid package. An 18 bln euro payment to them is expected by the end of the week. This will help reduce the ELA borrowings.

It would be much more significant if the ECB refused to grant Greece ELA privileges. There are three things the ECB can do to force a country to exit the euro zone would be to deny them the ELA, prevent the country’s banks from borrowing at the ECB, and denying them access to Target 2 settlement system. There is no sign that the ECB is trying to force Greece out of monetary union.

The ELA in Europe functions as national level lending facility that is approved by the ECB, but responsibility is borne by the national central bank. It more like a discrete discount window that has different collateral rules than a secret parallel currency or monetary system.

Europe has sufficient challenge and one need not invent more. The ELA is neither a precursor of the demise of EMU nor a tell that Greece is about to leave. The opposite is more true. The ECB has most recently increased Greece’s ELA limit and the recapitalization of Greek banks will help reduce its usage.

Editor’s note: this article has been corrected to reflect ELA as Emergency Liquidity Assistance instead of Emergency Lending Assistance as originally written.

Marc Chandler

About 

Marc Chandler joined Brown Brothers Harriman in October 2005 as the global head of currency strategy. Previously he was the chief currency strategist for HSBC Bank USA and Mellon Bank. In addition to frequently providing insight into the developments of the day to newspapers and news wires, Chandler's essays have been published in the Financial Times, Barron's, Euromoney, Corporate Finance, and Foreign Affairs. Marc appears often on business television and is a regular guest on CNBC and writes a blog called Marc to Market. Follow him on twitter.

1 Comment

  1. Edward says:

    To my knowledge it is Emergency Liquidity Assistance you are referring to right? not ‘Lending’..