ECB Freezes Greek Emergency Bank Aid as Referendum Looms

Kostas Tsironis/Bloomberg

The European Central Bank froze the level of emergency aid available to Greek banks in a move that threatens to cripple the country’s financial system after a flood of ATM withdrawals.

The Governing Council agreed on Sunday to cap the amount of cash available at the level set in its previous decision on Friday, it said in a statement. One euro-area official, speaking on condition of anonymity, said the ECB views the funds as insufficient for lenders’ requirements and that Greece will need to call a bank holiday before branches open on Monday.

The ECB also said it can use all tools available to protect the euro area, in a sign officials are now shifting focus to the potential fallout as Greece veers closer to a financial collapse. With Prime Minister Alexis Tsipras pledging a July 5 referendum on bailout terms previously proposed by creditors, a debt default and potentially an exit from the single currency are becoming increasingly likely.

“The ECB seems to have taken a balanced approach,” said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. “The Greek banks are in a terrible liquidity situation one way or another. Perhaps starting off with a bank holiday and then moving to capital controls is realistic.”

The ECB said it stands ready to review its decision and is monitoring the implications for its monetary-policy stance. It is “working closely” with the Greek central bank.

“The Governing Council is determined to use all the instruments available within its mandate,” the ECB said.

Bank Holiday

Any decision to impose a bank holiday or capital controls would have to be taken by the Greek government or the country’s central bank. A Greek government body that monitors the stability of the country’s financial system will convene later Sunday, said Panos Sokos, a spokesman for the finance ministry.

Two senior Greek bank executives said as many as 500 of the country’s more than 7,000 ATMs had run out of cash as of Saturday morning, and that some lenders may not be able to open on Monday unless there was an emergency liquidity injection from the Bank of Greece.

“The Bank of Greece, as a member of the Eurosystem, will take all measures necessary to ensure financial stability for Greek citizens in these difficult circumstances,” Yannis Stournaras, the Greek central-bank governor, said in the ECB statement.

The ECB has been reviewing Emergency Liquidity Assistance daily as June 30 approaches, when Greece’s bailout program expires and repayments to the International Monetary Fund fall due. The cap on the funds was last set at just below 89 billion euros ($99 billion).

Objection Right

The Frankfurt-based ECB took Greek banks off standard refinancing operations in February after the newly elected government said it opposed the terms of the country’s bailout package. Instead, lenders had to rely on the Greek central bank for funds to offset deposit outflows amid the uncertainty over the country’s future in the euro area.

The ECB Governing Council has the right to object to ELA and can curb it with a two-thirds majority. So far, it has determined that Greek banks meet the conditions that they be solvent and have adequate collateral.

While the cash has helped keep Greek banks alive, the ECB needs to protect itself should the government default on its debt. The banks’ capital levels and collateral values rely heavily on state guarantees on their assets, meaning the risk of a default automatically casts a shadow over their creditworthiness.

The ECB also has to guard against the risk of contagion should the Greek crisis threaten the fragile recovery of the rest of the currency bloc.

“We strongly endorse the commitment of member states in pledging to take action to address the fragilities of euro-area economies,” ECB President Mario Draghi said in the statement.

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