ECB exposure to Greece could spiral as political chaos accelerates capital flight from the country’s banking system and the Bank of Greece plugs the gap with “emergency liquidity assistance”. Some ECB officials may favour suspending Greek access to liquidity facilities to contain the ultimate loss to the Eurosystem.

The latest balance sheet statement on the Bank of Greece’s website refers to 31 August and shows liabilities to the Eurosystem of €110.0 billion. This represents money borrowed from other Eurozone central banks mainly for on-lending to Greek banks via standard repo operations and “emergency liquidity assistance” (ELA) against inferior collateral. Standard lending was €93.1 billion on 31 August while ELA was reportedly €6.4 billion as of that date.

Bank of Greece borrowing from the Eurosystem has probably expanded significantly since August as deposit outflows from the banking system have necessitated further ELA. Eurozone monetary statistics released last week show that Greek M3 deposits contracted by €5.6 billion in September while yesterday’s Financial Times referred to an estimated €10 billion outflow in October. The Eurosystem’s exposure to the Bank of Greece, therefore, may now be about €125 billion.

This exposure, of course, is additional to the estimated €45 billion of Greek government bonds bought under the ECB’s “securities markets programme”.

Greek M3 deposits stood at €187.0 billion at the end of September, of which €77.4 billion were overnight deposits. It is reasonable to expect a significant proportion of this instantly-accessible cash to leave the banking system amid current political chaos that has increased the probability of a disorderly Greek default and EMU exit. Eurosystem lending to the Bank of Greece, therefore, may soon surpass €150 billion if the ECB keeps the liquidity tap turned on.

Eurosystem lending is against collateral on which haircuts have been applied while the ECB’s purchases of Greek government bonds were made at a large discount to par. The mark-to-market value of these assets in the event of a disorderly EMU departure, however, would probably be no more than half of the current balance sheet amount. The Eurosystem, in other words, could suffer a loss of about €100 billion, assuming exposure of €200 billion (i.e. lending to the Bank of Greece of more than €150 billion plus bond purchases of €45 billion). This compares with capital and reserves of €81.5 billion but additional revaluation gains (on gold and foreign exchange) of €383.3 billion – convertible, presumably, into capital in an emergency.

What should the ECB do? Shutting down the Bank of Greece’s “poison pill” ELA operation would probably trigger an immediate banking system collapse and could be interpreted as de facto exclusion of Greece from monetary union. Keeping the tap on, however, would accommodate further capital flight, allowing Greek depositors to transfer their exposure to the Eurosystem and, by extension, tax-payers in other EMU countries.

Greece, of course, has an incentive to delay default while wealth-holders are still able to transfer their assets to safety, courtesy of the ECB.

ECB President Draghi faces an unenviable choice between current blame for pulling the plug on Greece and possible future blame for squandering the bank’s capital on a lost cause.