Greece seeks breathing room from ECB chief Draghi

[May 05, 2015]  By John O'Donnell and Frank Siebelt

FRANKFURT (Reuters) - Greek Deputy Prime Minister Yannis Dragasakis meets European Central Bank President Mario Draghi on Tuesday, as his government seeks financial breathing room to prevent a default and stay in the euro.

Talks between Greece's leftist government and its international lenders are stumbling over disputes about pension and labor reforms as the country edges toward a debt repayment deadline to the IMF it will struggle to meet.

With time running out for an interim agreement that Greek Prime Minister Alexis Tsipras had aimed for by May 9, Athens faces an immediate cash crunch, which its politicians believe the ECB can help resolve.

If euro zone finance ministers were to acknowledge progress in political talks when they meet next Monday, officials in Athens hope this would prompt the ECB to loosen restrictions on it selling short-term debt - filling its funding hole.

Persuading the ECB and its decision-making Governing Council, including central bank heads from the diverse 19-country euro zone, will however be difficult, in the words of one senior official.

The council meets on Wednesday in Frankfurt to decide on extra emergency funding for Greece's banks as negotiations on a cash-for-reform deal continue in Brussels between Greece and the International Monetary Fund, ECB and the European Commission.

People with knowledge of ECB deliberations predict that the council will agree to a further extension of Emergency Liquidity Assistance (ELA) for Greece's fragile banks. But many are doubtful that it will do much more.

Critics led by Germany's Bundesbank argue the ECB should take a harder line.

"People are fed up," said one senior euro zone central bank official. "But withdrawing ELA altogether would be a nuclear bomb."

OIL ON THE FIRE

The Bundesbank has argued for a steeper discount when valuing the security that Greek banks offer in return for roughly 77 billion euros of emergency funding. Increasing the "haircut" on collateral would have the same effect as lowering the funding cap, throttling back finance to Greek lenders.

But while an immediate tightening is not expected, the treatment of Greece is also unlikely to become more generous.

"Greece is a bigger and bigger headache for the Governing Council," said one person familiar with the talks, predicting no change to the status quo.

"It is highly unlikely that they will raise the 3.5 billion euro collateral limit on T-bills. It is also highly unlikely that they will somehow amend the haircut on Greek collateral."

The ECB has placed a 3.5-billion-euro ($3.9 billion) limit on the amount of short-term T-bills that Greek banks can offer in return for emergency funding.

As they are the only major buyers for such government debt, this cap effectively stops Athens from borrowing more.

Changing that would hit a number of hurdles, not least legal objections by the Bundesbank which argues that it breaks the rule that central banks should not finance governments.

Lifting the T-bill cap would also contradict the ECB's bank supervisors. They recently wrote to Greek banks instructing them not to increase their exposure to the government or state institutions, a person familiar with the matter said.

"They want to sound tough," said Martin van Vliet, an economist with ING.

"But the ECB is aware that Greece is discussing a possible agreement with the Brussels group. Time is running out. They don't want to pour oil on the fire."

(Additional reporting by Hugh Lawson and Frank Siebelt in Frankfurt, George Georgiopoulos in Athens and Reuters Bureaux; Editing by Paul Taylor)

[© 2015 Thomson Reuters. All rights reserved.]

Copyright 2015 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.