Ifo institute warns of extending Greek ELA

Current ifo president Hans-Werner Sinn and his successor, Clemens Fuest have expressed criticism of plans to extend Emergency Liquidity Assistance to Greek banks.

According to Sinn and Fuest, the extension of liquidty measures would constitute a mere extension of a Greek default.

“The total volume of ELA loans to Greece, which has been used to purchase sovereign bonds, is now estimated to be above €10bn, thereby exceeding the €7.5bn agreed by the Troika.”

Sinn and Fuest stress that the purpose of ELA lending should be to bridge liquidty gaps of solvent banks, rather than allowing insolvent banks to back up states on the brink of default, the latter should be the task of financial policy, they argue.

The ifo institute earlier advocated for Greek exit from the eurozone, describing it as “the lesser of two evils”. Sinn is an advocate of introducing a temporary two currency system in Greece, he argues that the country could only restore competitiveness by devaluing its currency.

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