ECB’s Stealth Mechanism to Bailout Banks: Emergency Liquidity Assistance (ELA)

The European Central Bank (ECB) through national central banks have been engaged in stealth inflationism via a program called the ELA

The Bloomberg explains, (bold emphasis added)

The first rule of ELA is you don’t talk about ELA.

The European Central Bank is trying to limit the flow of information about so-called Emergency Liquidity Assistance, which is increasingly being tapped by distressed euro-region financial institutions as the debt crisis worsens. Focus on the program intensified last week after it emerged that the ECB moved some Greek banks out of its regular refinancing operations and onto ELA until they are sufficiently capitalized….

Under ELA, the 17 national central banks in the euro area are able to provide emergency liquidity to banks that can’t put up collateral acceptable to the ECB. The risk is borne by the central bank in question, ensuring any losses stay within the country concerned and aren’t shared across all euro members, known as the euro system.

ECB Approval

Each ELA loan requires the assent of the ECB’s 23-member Governing Council and carries a penalty interest rate, though the terms are never made public. Owen estimates that euro-area central banks are currently on the hook for about 150 billion euros ($189 billion) of ELA loans.

The program has been deployed in countries including Germany, Belgium, Ireland and now Greece. An ECB spokesman declined to comment on matters relating to ELA for this article.

The ECB buries information about ELA in its weekly financial statement. While it announced on April 24 that it was harmonizing the disclosure of ELA on the euro system’s balance sheet under “other claims on euro-area credit institutions,” this item contains more than just ELA. It stood at 212.5 billion euros this week, up from 184.7 billion euros three weeks ago.

The ECB has declined to divulge how much of the amount is accounted for by ELA.

Ireland’s Case

Further clues can be found in individual central banks’ balance sheets. In Ireland, home to Europe’s worst banking crisis, the central bank’s claims on euro-area credit institutions, where it now accounts for ELA, stood at 41.3 billion euros on April 27.

Greek banks tapped their central bank for 54 billion euros in January, according to its most recently published figures. That has since risen to about 100 billion euros, the Financial Times reported on May 22, without citing anyone.

Ireland’s central bank said last year it received “formal comfort” from the country’s finance minister that it wouldn’t sustain losses on collateral received from banks in return for ELA.

“If the collateral underpinning the ELA falls short, the government steps in,” said Philip Lane, head of economics at Trinity College Dublin. “Essentially, ELA represents the ECB passing the risk back to the sovereign. That could be the trigger for potential default or, in Greece’s case, potential exit.”

So the current political impasse which has deterred the ECB from conducting a holistic bailout approach has been prompting for domestic based rescue programs via the ELA from EU's national central banks.

This also means the current distress exhibited through increased market volatility represents manifestations of accelerating intra-region bank runs which has so far eclipsed the inflation risks from ECB’s covert actions.

Meanwhile, surging balance sheets of ECB’s national central banks will put more downside pressure on the euro, and consequently builds up the case for higher gold prices overtime, perhaps once the current strains from risks of bank runs abates or when the risk of price inflation becomes amplified relative to risks of bank runs from the sheer weight of applied inflationism by the ECB and perhaps along with other major central banks.

Finally as I have been repeatedly saying, the abstruse nature of central banking will be used to shield activities of incumbent political agents

And for as long as the public remains unaware of the abstruse nature of central banking in manipulating and gaming the system to the benefit of the cronies and the welfare-warfare state, and importantly for as long as the effects or impacts on the markets by such policies remain mild and nonthreatening, central bankers will continue to resort to such measures.

Yet these represent signs of desperation by Europe's political authorities which will hardly solve the current crisis and will even exacerbate them (potentially enhancing the risks of the EU's disintegration).

Importantly, this provides us with further clues of the path of preferred policy recourse once these problems get out of hand, e.g Greek exit.

Gold prices may be headed down for now (which should serve as buying opportunities), but eventually, the trend reversal will likely be powerful once policymakers from developed nations steps on the monetary inflation gas.