Anyone hoping for Greek banks to reopen on July 7 has a troubling week ahead of them.
The country’s lenders have been weakened by a deposit run that’s left them on a drip-feed of liquidity. Their dwindling chances of staying alive hinge on a deal between the government and its creditors, and that path to salvation runs through Frankfurt.
That’s where European Central Bank governors will meet on Wednesday to assess the solvency of the banking system, after days of intensifying dialog with the Greek central bank and a June 30 deadline for Greece to repay the International Monetary Fund. Depositors, shut off from their cash and due to vote Sunday on bailout conditions that could rescue the country’s finances, are bearing the burden for now.
“All eyes remain on the banking system,” said Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research in London. “Bank of Greece Governor Yannis Stournaras has sent calming signals saying that the banks have sufficient liquidity to operate during the week-long bank holiday. The future beyond that however is full of risks.”
The ECB is in the spotlight because of its dual roles as lender of last resort and euro-area bank supervisor. It has to decide whether liquidity has dried up so much that the nation’s financial system is bust -- which might force a decision to curb emergency aid, plunging banks into an abyss they can’t escape.
ECB Executive Board member Benoit Coeure said the central bank will maintain that funding, Emergency Liquidity Assistance, “until further notice,” in an interview with Les Echos published on Monday. He also said that a Greek exit from the euro area “can unfortunately no longer be ruled out.”
After repeatedly increasing the cap on ELA, which is provided by the Greek central bank, the ECB froze it at just under 89 billion euros ($99 billion) on Sunday. While capital controls will ease the deposit outflows that made ELA necessary, banks still depend on the credit line to keep operating. Should it be shut off, they’d have to pay the cash back.
The ECB’s 25-member Governing Council, which includes Stournaras, will meet on July 1. Assuming a last-minute deal is still lacking and the government has missed its IMF repayment, policy makers will have to discuss whether banks’ assets, heavy on sovereign-debt holdings and state guarantees, have deteriorated so much that ELA needs to be curbed.
The Greek government also owes about 470 million euros to its own central bank on Tuesday. A failure to repay that loan could be seen as a violation of European rules against direct monetary financing and would further weaken the country’s position before the Governing Council meeting. The government is in talks with the central bank to settle the loan with payments the central bank owes to the state, Deputy Finance Minister Dimitris Mardas said in an interview today, declining to give further details. An ECB spokesman declined to comment.
Even if ELA continues, more potential trigger points lie ahead, in particular the July 5 referendum on an incomplete creditor proposal, and bond repayments to the ECB next month. Coeure said he sees room for a political deal if Greek voters support the proposal, signaling the ECB may wait until then.
“As long as there is a prospect for a ‘yes’ in the referendum, which means a prospect for a new form of assistance, there is no obvious reason to modify the solvency assessment,” said Nicolas Veron, a fellow at the Brussels-based Bruegel research group.
A vote in favor of a deal with Greece’s creditors might pave the way for deposits to return and banks to open -- albeit with controls in place. Cyprus, the sole other euro-area country to impose capital controls, only this year removed the last of the restrictions imposed in 2013.
“It’s very easy to impose capital controls, but it’s very difficult to exit,” Spyros Stavrinakis, the former deputy governor of the Cypriot central bank, said in an interview with Bloomberg.
If voters back Greek Prime Minister Alexis Tsipras’s stance that the creditors’ proposal is a “blackmailing ultimatum,” the outlook for banks darkens.
“With a ‘no’ vote in the referendum, it will be tough to reopen the banks,” said Raoul Ruparel, co-director of Open Europe, a research group based in London. “They’ll need to impose very strict capital controls, restrictions on all transactions, and they’ll need to introduce a parallel currency.”
With the country starved of funds, the ECB may judge that lenders are no longer solvent and end ELA. As Europe’s Single Resolution Mechanism won’t be fully operational until Jan. 1, and Greece is still in the process of adding European Union resolution rules to its domestic laws, the design of a rescue for failing lenders would fall to Greek authorities.
Money for recapitalization would be hard to find. The leftover cash from the Hellenic Financial Stability Fund is tied to the current bailout program and so expires on June 30.
The search for capital could even lead to bank creditors and, as a last resort, depositors being bailed in and forced to take losses. That’s a way off, the law is unclear on how easy it would be, and it’s politically charged.
“That’s a possibility somewhere down the line,” Jonathan Loynes, chief European economist at Capital Economics Ltd., said by phone. “It’s a possibility if the ECB pulls its support for Greek banks. Then the Greek government might look for alternative sources of funds to prop up the banks, and that focus might start to fall on deposits, but that’s not a firm prediction.”
When the EU presented Cyprus with a proposal to force losses on all depositors in exchange for a 10 billion-euro bailout in 2013, the plan triggered protests and political upheaval on the island, and was rejected by the country’s parliament. A subsequent agreement closed down Cyprus Popular Bank Pcl, the second-largest lender, and imposed larger losses on uninsured depositors. That experience may too be weighing on the ECB.
“If the ECB walks away, then what we are doing is destroying a bank system, and that means we are destroying people,” said Chris Wheeler, an analyst at Atlantic Equities LLP in London. “It’s not really the way to behave and don’t be surprised when you bring down the world on your head.”
For more, read this QuickTake: Capital Controls
(A previous version of this story was corrected to remove a reference to capital in the second paragraph.)