After a dramatic weekend in the Greek debt crisis, the European Central Bank on Sunday decided to freeze its emergency lending lifeline to the country’s banks, significantly raising the risk of bank holidays and capital controls as soon as Monday, according to analysts.
The decision from the ECB means there won’t be any extra funding through the emergency lending assistance (ELA) to prop up the debt-laden country’s banks to cover any deposit flights over the weekend.
Among analysts, the move is widely seen as forcing the Greek government into closing down the banks next week to stem an expected deposit run on the banks.
Kit Juckes, strategist at Société Générale, set the downbeat tone among the analyst community in a post to Twitter.
Karl Whelan, economics professor at the University College Dublin also raised his concerns on Twitter, explaining why we should expect bank closures in Greece already from Monday.
In a blog post, Whelan followed up: “It is easy at this point to panic and say it’s the end of the world and a new currency must be days away. It’s worth remembering, however, that Cyprus coped surprisingly well with the capital controls imposed in 2013. These controls were lifted this year and the banking system survived. There is probably still a small window of opportunity left to keep Greece in the euro, even if the banks don’t open tomorrow.”
Other analysts were equally downbeat on the prospects for the funding situation in the banking sector for next week.
“The closure of the banks will have a highly damaging effect on what was already a very weak Greek economy. The cash squeeze on the Greek government is bound to intensify, meaning that domestic payment arrears are bound to mount further while public sector workers and pensioners might well have to be paid with IOUs as soon as end-July. That would likely represent the first steps to issuing a parallel currency.” — Chris Scicluna, head of economic research, Daiwa Capital Markets
“It looks not great. I have to say I am surprised as to how it is panning out at the moment. Capping the ELA is a fairly significant move as the ECB knows Greek banks are already all but insolvent. They are relying upon the liquidity of the ECB and the lack of extension could well be crippling. This is the ECB really cranking up the pressure on Greece.—Richard Perry, market analyst, Hantec Markets
“With continuing deposit outflows, Greek banks may not be able to open for long in the coming week. After Tsipras announced the referendum Friday night, Greeks reportedly withdrew €1bn from cash machines on Saturday. This may force Greece to declare bank holidays or limit deposit withdrawals soon.” — Holger Schmieding, chief economist, Berenberg
