ECB Set to Give Greece Emergency Cash

The ECB is set to announce it will provide emergency lending to Greece even as both continue negotiations on a long-term agreement over the Mediterranean nation’s debt crisis.

The ECB governing council has already increased its cap on lending to Greece, most recently by 1.5 billion euros, or about $1.6 billion, after the Country neared its limit for cash injections. The ECB currently has a limit of 75.5 billion euros, or about $83 billion.

The ECB is set to announce it will provide emergency lending to Greece even as both continue negotiations on a long-term agreement over the Mediterranean nation’s debt crisis.

The ECB governing council has already increased its cap on lending to Greece, most recently by 1.5 billion euros, or about $1.6 billion, after the Country neared its limit for cash injections. The ECB currently has a limit of 75.5 billion euros, or about $83 billion.

However, most analysts expect that limit to rise again this week, with the likelihood of the ECB eventually providing whatever liquidity necessary for Greece.

Some economists have recently argued that the macroeconomic risks to the Eurozone in the case of a Grexit have fallen to near zero, raising the possibility that the ECB will cease providing support. That argument has gained much attention since Greece’s recent quiet removal of Yanis Varoufakis, Greece’s hardline Finance Minister, whose negotiation tactics have been harshly criticized by Germans as “uncooperative” and “unprofessional”. Most recently, Greece announced Varoufakis would no longer be in charge of negotiations with the ECB in a move some believe indicates Greece wants to tone down the hostility towards the Germans and the ECB.

However, some counter that the hostility was not limited to Varoufakis, who is becoming the scapegoat to allow Greece to take a more conciliatory tone. Greece Prime Minister recently attacked Germany, noting that the country owed Greece 160 billion euros in war reparations to compensate for a forced loan the Nazis thrust on Greece during World War II. For its part, Germany has not acknowledged responsibility for that debt.

Grexit Not a Plan

While he ECB is set to inject billions into Greece to ensure it can pay back its outstanding debts, which are largely held by German and French banks, the ECB has also signaled that they will not allow Greece to exit the euro or the EU.

According to ECB Executive Board Member Benoit Coeure, the ECB is not planning on a “Grexit” as it plans to release more emergency funds to the country. “The exit of Greece is not a scenario we are working on,” Coeure said. 

He also noted the euro is likely to recover in 2015 and 2016 after losing over 10% of its value in the last 9 months.

The fall in the euro has also been met with deflation in the first quarter of 2015, which the ECB has vowed to combat through a quantitative easing program similar to the one the Federal Reserve enacted in late 2012. Involving over a trillion euros in asset purchases, the European QE program is set to last through the year.

The efficacy of the program has been debated, however, as consumer prices fell in March. That month, inflation was -0.1%, which was in-line with analysts’ expectations. However, that rate of deflation was an improvement from February when inflation fell -0.3%.

In March, restaurants and cafes led price gains in Europe, with inflation of 0.1%. Meanwhile, fuel fell 0.44% and heating oil fell 0.1%, leading to speculation that the deflationary trend is a result of the oil glut and not a failed austerity policy in the EU. Additionally, some believe the savings in energy costs will encourage more consumer spending, although that dynamic has proven elusive in the U.S. and Britain, where consumers are instead choosing to pocket their savings from cheap energy.