Emergency liquidity assistance cap raised for Greece

This week, the European Central Bank raised the limit on emergency liquidity assistance (ELA) which has created problems for the Greek financial system and foreign exchange trading.  The cap on ELA was raised by 2 billion euros to 78.9 billion euros.

Greek banks are being stopped from trading currencies because international dealers have cut back on credit lines, meaning that the maximum loan balance that the bank is allowed to borrow is reduced.

Trading currencies is usually one of the most liquid markets because trades are easy to execute and changes in supply and demand make a small impact on price.

January 2015 saw a change in the Greek government which led to a state of reduced spending and increased frugality in the financial sector, and liquidity also decreased as a result. Alongside this, when discussions took place between Greece and its creditors, credit lines were cut off and foreign exchange trading became tougher.

Vassilis Karamanis for Bloomberg reports that anonymous trading experts say international securities firms are restricting trading with Greece’s major lenders because it may expose them to risk because of the country’s economic state. “International securities firms are curtailing trading with Greece’s major lenders that may expose them to the risk of a default by the nation and the possible use of capital controls to stem outflows from banks,” Karamanis reports.

Greece has been undertaking discussions about leaving the Euro which could result in the currency declining and may also leave counterparties exposed to multiple risks. These talks have also led to depositors withdrawing funds from the Greek lenders which would mean that banks have to rely on ELA.

Mark Williams, a former bank examiner for a Federal Reserve Bank states that Greece’s involvement in the foreign exchange market shows that the country is attempting to improve their economy. “The latest sign the market is attempting to fortify itself against a Greek default is playing out in the FX market. The market has increasingly become aggressive in preparing for a Greek default and in protecting itself from the potential financial impact,” Williams said.

Greek banks are also trying to combat threats by hedging which is when a trading strategy is designed to reduce risk as the second transaction is used to offset the risk of the first. Hedging is also used to reduce any large losses that an organisation could suffer from.

Greek counterparties may be asked to offer their share of a euro-dollar trade first even if it means they will not receive what they are owed until the next day. This is how some global banks have taken steps to reduce risks in foreign exchange and are taking a more positive attitude towards the Greek financial crisis, rather than making cuts.

Bloomberg reports that one London-based FX trader said his bank provides credit lines to Greek counterparties to cover their foreign exchange needs, accommodating transactions on tenors that are no longer than a week, on a case-by-case basis.