The issue of liquidity in Greek banks is one of the most pressing now that the referendum is over. As widely reported, Greek banks are running out of reserves – even with capital controls in place since June 28 putting a €60 cap on the amount Greeks can withdraw from their accounts. There are a number of pressing issues that, if not resolved, could lead to a Grexit.
With a freeze on the amount of emergency assistance being provided by the European Central Bank (ECB), Greek banks remain unable to reopen. A short-term solution would be for the banks to issue IOUs backed by the Bank of Greece. This, however, would effectively be a parallel currency and would be the first stage of reintroducing the drachma. It would also be a big step toward leaving the eurozone.
The ECB is withholding the amount of emergency liquidity assistance (ELA) it is providing Greece in lieu of a bailout deal that will guarantee (in their eyes) Greek solvency. Pending the ECB stepping in to stabilise banks with more ELA, Greek banks will remain shut – and their reserves will quickly diminish.
The clear and present danger is that Greece’s creditors will maintain an attitude of “euro-hubris”. This attitude is displayed in an inflexible commitment to obeying fiscal rules irrespective of their socio-economic outcomes. Consequently, the ultimate price to pay for the Greek No will be a Grexit.
Keeping banks shut
The decision on whether or not Greece will receive the added ELA that it needs is in the hands of the ECB and its governing council. It consists of the six executive board members and the presidents of the 19 central banks of the eurozone countries. Despite claims to independence, the management of the ECB is closely tied to the Eurogroup of finance ministers. They are seen to be the most virulent in their opposition for debt relief for embattled euro member states.
It should be noted that the decision to limit the amount of ELA to Greece is not a case of simply following the rules. It is not beyond the ECB’s remit or precedent to give more assistance to Greece at present. The ECB’s Quantitative Easing (QE) programme to increase liquidity and lending among the eurozone’s banks has included buying the sovereign debt held by these banks (including French and German banks’ purchases of Greek debt). QE is being extended to buy the assets of public utilities, with the prospect of the programme being extended to purchase corporate bonds in the eurozone countries. A key question for the ECB is why this is not being undertaken in Greece.
The ECB is also in breach of its ELA covenants in that it is extending these funds to Bulgaria on the same terms as other member states as a backstop against financial contagion from its neighbour’s crisis and a possible Grexit. Yet, Bulgaria is not a member of the eurozone. It is apparent that the ECB’s legitimacy is being undermined by its own actions. Moreover, its political interventions seriously question its central bank role as the lender of last resort to the eurozone banking system.
Responsibility for the provision of ELA is normally deferred to the national central bank in question – so it is the Bank of Greece that should decide the costs and risks arising from granting ELA. If the ECB’s governing council feels that ELA provision interferes with the wider eurozone system, however, it may step in and halt provision. The key question is whether Greece is considered to have a temporary liquidity crisis or a near permanent one.
Other real and fanciful scenarios
In the face of ECB intransigence and no speedy resolution to the crisis, the most likely scenario is the issuing of IOUs as a domestic parallel currency. There are, however, other possible scenarios:
Turning the 3% of total sovereign Greek debt owned by Greek banks into equity (about €10 billion).
The more unlikely scenario of the IMF riding to the rescue, in the form of emergency liquidity, under pressure from the US government to avoid a humanitarian crisis.
None of these are probable in the immediate future but may depend on how negotiations go with their creditors. Time is on no one’s side, however.
The more fanciful options for raising capital in the medium term include leasing airbases to the Russians in return for gold deposits; a fire-sale of infrastructure assets to the Chinese; and nationalising, without compensation, assets owned by other EU corporations. All of these would have profound geopolitical consequences for Greece remaining within the EU (and are therefore unlikely).
In the absence of the European institutions moving from their present stance of euro-hubris and seeking to redesign the whole eurozone architecture, the EU may be destined to go the same way as the Ottoman Empire. That is, transnational ambition imploding into fractious nationalism – something the continent is all too familiar with. If Greek banks run out of cash, leaving the euro will be their only option.