Eurozone Central Bank Now Controls Destiny of Greece’s Battered Banks

By JACK EWING and JAMES KANTER JULY 5, 2015



Greece Votes on Bailout Referendum

FRANKFURT — Now that Greek voters have said no to the economic demands of its international creditors, the fate of the country’s struggling banks is in the hands of the European Central Bank.

Greece
’s banks, closed since last Monday because they are perilously low on cash, have been kept alive in recent weeks by emergency loans from the European Central Bank. On Monday, the central bank’s policy makers plan to convene to determine how much longer they are willing to prop up the Greek banks, now that the country has essentially said no to the unpopular dictates of the other eurozone countries.


No economy can function properly without banks; if they toppled, so would the Greek economy.


The European Central Bank said it had no immediate comment on Sunday evening.


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If the central bank hews strictly to its rules — which require banks to be solvent to receive loans — its Governing Council on Monday would stop providing cash to Greek banks. But the central bank’s president,Mario Draghi, who has repeatedly cited the human cost of Greece’s crisis, might be tempted to find a way around those rules, arguing that choking off financial support would thrust untold hardship upon ordinary Greeks and might send the country on its way out of the euro currency union.

And the central bank may want to wait to see what eurozone heads of state decide at an emergency summit meeting on Tuesday that was announced on Sunday night. Donald Tusk, president of the European Council — which represents European leaders — wrote in a Twitter message that the meeting would be held Tuesday at 6 p.m. “to discuss situation after referendum in #Greece.’’ Assuming that the Greek prime minister, Alexis Tsipras attends, it would be his first meeting with his eurozone peers since the referendum on Sunday.


The summit meeting could be intended to help the European Central Bank make difficult decisions in the coming days, said one analyst, Mujtaba Rahman, the Europe director for the Eurasia Group, a political risk consultancy. One purpose of the summit is probably to give the E.C.B. “the political cover it needs if it decides cut off Greece’s banking system,” he said.


The Eurogroup of eurozone finance ministers planned to convene in an emergency session on Tuesday ahead of the summit. It was the inability of Greece and the Eurogroup to reach a bailout agreement, despite five months of trying, that prompted Mr. Tsipras to break off negotiations and call for Sunday’s vote.


In a statement, Jeroen Dijsselbloem, the head of the Eurogroup, said that the result of the referendum was “very regrettable for the future of Greece” and warned that “difficult measures and reforms are inevitable” for the recovery of the Greek economy.


Greek central bank officials and banking executives were reportedly meeting Sunday night in Athens to discuss next steps, which presumably would include whether to place further restrictions on depositors’ ability to withdraw money.


When the government decided to close the banks a week ago, it said they would reopen this Tuesday. But entering the weekend, the banks had only about 1 billion euros, or $1.1 billion, on hand, Louka Katseli, the head of Greece’s banking association, said on Friday.


In the panic that is likely to ensue if the banks reopen this week, that money would probably quickly evaporate, unless Athens imposed even stricter limits than the daily cap of €60, or about $67, which has been in place for people with Greek bank cards.


Because no country in the 16-year history of the euro currency union has ever been as close as Greece to an economic collapse with no near-term prospect of bailout help, there are no precedents to draw upon in predicting what could happen next.


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“It’s fair to say we can expect a few surprises in the next few days,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. “Clearly, we are in uncharted territory.”

The European Central Bank’s Governing Council, whatever it might do or not do about Greek banks on Monday, could decide to focus its energy on minimizing the collateral damage elsewhere in the 19-nation eurozone. One way to do that would be to pump money into the bloc’s economy by stepping up the central bank’s purchase of government bonds and other debt from other eurozone countries.


But for Greece, its banks pose the clearest immediate danger. For months, they have depended on the E.C.B.’s emergency loans to compensate for withdrawals of money by Greeks who are worried that their government would be unable to reach a bailout agreement with its creditors.


The extent of that dependency became clear last week after the central bank decided to cap the emergency loans at about €89 billion euros. Because much of that credit line had already been used, the borrowing cap forced the government to close the banks before they ran completely out of money.


Adding further stress, the banks have large holdings of Greek government bonds, which have already plunged in value and are likely to fall further after Sunday’s vote.


In a briefing note on Sunday, Mr. Rahman, the Europe director of the Eurasia Group, said that a no vote by Greeks would probably tilt the balance of opinion on the Governing Council in favor of members from Germany, Latvia and other eurozone countries that want to take a hard line with Greece.


Peter Kazimir, the finance minister of Slovakia, which is a member of the eurozone, wrote on his Twitter account Sunday night that “the nightmare” of the architects of the euro — that a country could quit the single currency — now “seems like a realistic scenario.” Mr. Kazimir, who has previously taken a tough stance on Greece’s demands, also wrote that there needed to be a response as soon as possible to the referendum.

But he emphasized that the vote by the Greeks “cannot mean that they will get the money easier.”


When the Greek government’s debt problems became evident during the financial crisis, leading to international bailouts of the country in 2010 and 2012, one big worry was that other European banks could be dragged down by losses on their Greek holdings.


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Now, though, as European banks have sold off their Greek investments and new eurozone banking regulations have been put in place, that risk has been greatly reduced, according to the European Banking Federation, an industry trade group.

“European banks in recent years have significantly reduced their exposures to Greece, greatly limiting the risk of contagion through the banking system to other countries,” the British bank Barclays wrote in a briefing note on Friday.


Barclays said that other euro countries had exposure to Greece amounting to only 3.5 percent of the eurozone’s gross domestic product and that exposure of European banks to Greece had fallen to less than one-tenth of that level.


But Barclays warned that the safeguards put in place in the last five years were not “infallible.”


Even if the E.C.B. and other eurozone countries decide that Greece’s banks deserve some sort of rescue, the process would be far from painless.


The central bank’s emergency loans would not be a permanent solution. The longer-term fix would probably need to come from a war chest called the European Stability Mechanism, which the eurozone countries set up during the financial crisis to guard against future calamities.


That fund was used in 2012 and 2013 to lend €41 billion to the Spanish government to help rebuild the assets of Spain’s banking system, which was teetering toward collapse. It was also used the next year to lend €9 billion to Cyprus; some of those funds were used for its banks.


In the case of Cyprus, there were howls of protest when a eurozone bank bailout for the first time required some depositors to take “haircuts,” or losses on their money.


But two years later, as the new Cypriot government that came to power during the crisis met the bailout conditions set by the eurozone and the International Monetary Fund, that solution has been deemed largely successful.


With no immediate prospect of a resumption in bailout talks between Greece and its creditors, a Cyprus-style rescue of the banks might not be in the cards. But if the European Central Bank and eurozone countries decide not to let the Greek banks collapse, depositors might be forced to take some losses.


“There would certainly have to be a quid pro quo,” said Daniel Gros, the director of the Center for European Policy Studies, a research organization in Brussels. “And I’m almost certain that there would have to be some haircutting.”

http://www.nytimes.com/2015/07/06/bu...red-banks.html