Greece to offer new liquidity guarantees to banks

ATHENS: Greece plans to supply banks with loan guarantees of up to 30 billion euros ($41 billion) to help them tap the central bank's emergency funding window and ease their liquidity squeeze, Greek newspaper Kathimerini said on Saturday.

Troubled by sovereign debt downgrades, deposit outflows and a dwindling stock of eligible collateral to access European Central Bank funding, some Greek banks have already made use of the emergency liquidity assistance (ELA) facility.

"Draft legislation will be submitted in the coming days to enable the immediate activation of the new liquidity package that will be provided to commercial banks through the emergency liquidity mechanism at the Bank of Greece," the paper said.

The Bank of Greece readied the ELA facility last month to supply lenders with funds if needed.

ELA is one of the options the euro zone has at its disposal to keep Greek banks afloat if the country's sovereign debt is pushed into default by a new bailout deal put together by EU leaders in July and the ECB stops accepting the debt as collateral.

The Greek banks could then turn to the national central bank where they could raise funds, at a higher cost, against other types of collateral or issue their own bonds guaranteed by the government.

Athens is keen to avert additional systemic stress given the pressure on the banking sector from rising loan impairments as the recession deepens and from write-downs in a debt swap (PSI) that is part of the country's second bailout package.

Shut out from the inter-bank market, Greek banks have become dependent on the ECB for liquidity, borrowing at its money market operations by putting up Greek government bonds and other assets as collateral.

Based on the latest data, ECB funding to Greek lenders dropped to 96.3 billion euros in July from 103 billion in June.

The steep fall of Greek bond prices after a barrage of sovereign debt downgrades and default worries has reduced the value of banks' collateral pools.

Copyright Reuters, 2011