The European Central Bank is awaiting a midnight signal from the Greek parliament before it can grant fresh liquidity to keep the country’s lenders alive.
At its regular two-day meeting in Frankfurt starting Wednesday, the Governing Council will discuss a Greek banking system that is in limbo after more than two weeks of closure and capital controls, and which the European Commission says is close to collapse. A decision on the level of Emergency Liquidity Assistance for lenders is planned for Thursday, a person familiar with the matter said.
While the ECB could help by increasing the cap on ELA, it needs assurances that Greece will proceed with a planned bailout program, including repaying debt to the central bank on July 20. The Governing Council meets hours before Greek Prime Minister Alexis Tsipras puts reform measures to his legislature that have sparked a rebellion in his party.
“I believe they will leave the cap unchanged until after the vote, and start increasing it afterward, always step-by-step and conditional on program implementation,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “That can happen as soon as tomorrow or on Friday for a first step, following a conference call. I don’t see how the ECB could accept a delay in the July 20 payment.”
The Greek parliament will start a plenary debate at around 3 p.m. Athens time on Wednesday on the measures demanded as a condition for the country’s bailout, and is scheduled to finish at midnight with a vote.
The ECB will complete its meeting on Thursday morning, and will also cover policy issues such as interest rates and asset purchases. President Mario Draghi will hold a press conference at 2:30 p.m. in Frankfurt.
In an assessment published Wednesday, the European Commission said Greek banks have almost exhausted the eligible collateral they can post for ELA and will “inevitably” collapse without a bailout. It said the prospects for Greek lenders are more negative than those assumed in the stress tests carried out by the ECB last year.
ELA, provided by the Greek central bank at its own risk and subject to ECB approval, has been capped at 88.6 billion euros ($97.7 billion) since June 23. Fearful of a default, policy makers tightened the collateral requirements on July 6.
Now, after an all-night political summit that ended on July 13 and set the conditions for a bailout package of as much as 86 billion euros, the prospect that funding conditions could be eased is solidifying. The ECB’s bank-oversight arm is already considering the measures needed to ensure lenders’ survival.
“Firstly, it must be guaranteed that Greek banks will be sufficiently recapitalized within the framework of a new aid program,” ECB Single Supervisory Mechanism board member Andreas Dombret said in a speech in Munich on Wednesday. “Secondly, it must be ensured that there is enough available liquidity, should depositors want to withdraw more money after the opening of the recapitalized banks.”
That will take time. While the bailout agreement crafted in Brussels foresees as much as 25 billion euros in recapitalization, the money is tied to a long-term privatization fund to be established in Greece.
It isn’t yet clear how any up-front equity injection would be provided. Nor is it clear how the country will pay its bills over the coming days unless it receives some form of bridge financing. Greece is due on Monday to repay the European Central Bank for 3.5 billion euros in maturing bonds bought under an earlier crisis program.
The European Commission is seeking as much as 7 billion euros in bridge financing for Greece from the European Financial Stabilization Mechanism, a crisis-response fund that requires approval from all 28 EU nations. To get around legal hurdles, ministers are looking at whether they could extend guarantees to non-euro nations that those countries would be shielded from any Greece-related losses.
While that wrangling continues, the ECB must decide if it wants to allow extra liquidity for Greek banks without full clarity on how the country’s government will be funded. Draghi is likely to be quizzed on his timing at his press conference.
“Draghi will try his best not to get pulled deep into the Greek mire, in order to avoid taking a political view,” said Johannes Gareis, an economist at Natixis in Frankfurt. He may “hint at a possible ELA lift once conditions are met that allow Greece and its creditors to start negotiations on a third bailout program.”
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