Nowotny Says Greek Bridge Loan Option Needs Discussion

The European Central Bank could consider bridge financing for Greece as creditors explore ways to keep the country afloat while attempting to resolve its debt crisis, said ECB Governing Council member Ewald Nowotny.

“The discussion surrounds whether the ECB can undertake a step in anticipation, a bridge program,” Nowotny, who heads Austria’s central bank, said in an interview with ORF television late Monday. “Whether this is possible is exactly a point that has to be debated.”

Greek Prime Minister Alexis Tsipras is in Brussels for meetings with euro-area leaders in what could be a last chance to secure bailout funds. In the meantime, the ECB holds the country’s fate in its hands through its power to deny emergency aid for Greek banks.

Nowotny said the ECB will be forced to cut off that liquidity should the country miss a July 20 payment to the Frankfurt-based central bank.

“This would effectively be a state bankruptcy, a default,” said Nowotny. “In this situation, the ECB would no longer be in a position to provide further liquidity.”

A decision on how to resolve the crisis is therefore needed “swiftly,” he said. “You can’t more or less freeze an economy.”

After German Chancellor Angela Merkel said “time is running out” for Tsipras to come up with a plan, euro-area finance ministers gathered for talks, with divisions remaining over what they were willing to accept. Leaders are scheduled to convene at 6:30 p.m. Brussels time.

No Substitute

Greece, Europe’s most-indebted country is closer than ever to an exit from the euro area, with banks low on cash and creditor nations led by Germany running lower on patience. Without significant new funds from the ECB, Greek lenders -- shuttered for more than a week -- will have to remain closed indefinitely, strangling the country’s economy.

Cash is likely to last “through this week but at some point new measures will be necessary,”said Nowotny. While introducing IOUs to pay Greece’s bills is “conceivable,” whether such a step would make sense “is a different question,” he said. In any case, such action would be effective “for a week, perhaps two. But that’s not a currency, that’s not a substitute for a currency.”

The ECB on Tuesday warned that “moral hazard” could be a reason to object to emergency liquidity assistance, just a day after it tightened conditions on the aid for Greece. The reference indicates that officials are worried that bending the liquidity rules for Greece may lead future recipients to act less responsibly.

On Monday, the central bank increased the discounts on collateral for lenders receiving ELA from the Bank of Greece. That makes it more difficult for them to access the funds that have kept them alive as deposit withdrawals accelerated amid uncertainty over the country’s place in the euro.

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