ECB Said to Confer on Emergency Greek Aid Amid Cash Flight

Greece Capital Controls Likely, Default Not Inevitable

The European Central Bank plans to hold an emergency session of its Governing Council on Friday to discuss a deterioration in liquidity at Greek banks, three people familiar with the matter said.

The call is scheduled for noon Frankfurt time, when officials will consider a Bank of Greece request for an increase of more than 3 billion euros in Emergency Liquidity Assistance, one of the people said. All three people asked not to be identified as the plans aren’t public. An ECB spokesman declined to comment.

The call comes just two days after Greece received a 1.1 billion-euro ($1.25 billion) increase in ELA that took the cap to 84.1 billion euros. The short interval reflects an acceleration in deposit flight amid uncertainty over the country’s future as the latest bailout talks ended without progress on Thursday.

“The solvency of the Greek banking system is utterly dependent on the stance of the ECB,” said Stephanie Flanders, chief European market strategist at J.P.Morgan Asset Management in London. “ECB officials have said all along that the bank is a ‘rule-based’ institution and, beyond that, the key decisions about Greece need to be taken by politicians. But that is going to be a difficult line to sustain in an environment in which the interpretation of those rules is deeply political.”

Political Uncertainty

Greek deposit withdrawals have exceeded 4 billion euros this month, with the pace of outflows markedly accelerating this week, a person familiar with the matter said. About 1.85 billion euros was withdrawn in the last two days alone, the official said, asking not to be named, as he wasn’t authorized to speak publicly on the matter.

German government bonds rose on Friday, extending a second weekly gain, and the euro fell. Ten-year bund yields fell 3 basis points to 0.78 percent as of 9:43 a.m. Frankfurt time. The euro fell 0.3 percent to $1.1328.

With Greece cut off from global markets, the country’s financial system depends on central-bank liquidity to replace deposits withdrawn amid the political uncertainty over the country’s place in the euro. The ECB has consistently said it will fund solvent banks that have enough collateral, but can’t allow the liquidity injections to be used to finance the government.

The total level of available ELA has risen from less than 60 billion euros in February, when the ECB effectively locked Greek banks out of regular refinancing operations. The Governing Council reviews the amount weekly and can restrict the funding. It also has the power to insist on higher discounts on the collateral banks post to receive the cash.

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