Jeff Black and Paul Gordon Frankfurt
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 yesterday 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 viewed the funds as insufficient for lenders’ requirements and that Greece would need to call a bank holiday before branches open today.
The decision suggests the ECB wants to protect its own balance sheet 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 an exit from the single currency are becoming increasingly likely.
“The ECB seems to have taken a balanced approach,” said Nick Kounis, the head of macro research at ABN Amro Bank. “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 was ready to review its decision and was monitoring the implications for its monetary-policy stance. It said it would use all instruments within its mandate to ensure price stability in the euro area, and was “working closely” with the Greek central bank.
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 was to convene later yesterday, said Panos Sokos, a spokesman for the finance ministry.
Bank run
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 yesterday morning, and some lenders might not be able to open today unless there was an emergency liquidity injection from the Bank of Greece.
The ECB has been reviewing Emergency Liquidity Assistance (ELA) daily as June 30 approaches, when Greece’s bailout programme expires and repayments to the International Monetary Fund fall due.
The 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.
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. –
Bloomberg