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If the European Central Bank cuts off aid to Greek banks

13 June 2015 / 23:06:11  GRReporter
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A rift with partners would lead to an increase in sovereign debt by about €100 billion, as liquidity provided to Greek banks via the Emergency Liquidity Assistance (ELA), strains the balance sheet of the Bank of Greece rather than that of the European Central Bank. Thus, the inability of banks to repay the money they received will affect the Bank of Greece, and thereafter the state finances.

Besides, the banks have dished out about €100 billion in loans to companies and households in order to obtain liquidity through the ELA. This means that around 55% of total loans provided by the banks are collateralised in the European System of Central Banks (the Eurosystem). A senior bank official said before Kathimerini: "In practice, this concerns all healthy loans to companies and households, i.e. the loans, which are serviced regularly."

In other words, the best performing business and mortgage loans are pledged to the Bank of Greece and the Eurosystem as collateral to obtain liquidity, and they can become the basis for future claims. Greek banks have received around €80 billion from ELA, but the collateral they have offered amounts to at least €100 billion because the ECB has truncated the face value of collateralised assets for security reasons. As bank representatives believe, these guarantees can become the basis for legal claims against the country if the situation deteriorates into a rift.

The heads of the banks emphasised that all this is too academic and an agreement is the only reasonable way out. According to them, the consequences of a Grexit will be horrendous not only for the country at present, but for future generations as well. Representatives of the banking sector have pointed out that an early agreement must be reached so as to avoid the imposition of capital restrictions. If the latter materialise, it will hit businesses and the country’s economic performance as a whole. The already weakened economy will be subject to a shock.

A publication by Reuters yesterday maintained that the ECB is already preparing to terminate the provision of liquidity to Greek banks in the event that the country suspends its payments. According to the publication, late June will be the crunch time for Greece. While discussions and consultations are still going on, the ECB cannot deny funding to the Greek banks as long as they are stable and have adequate reserves.

If an agreement fails to materialise at short notice, and given the ongoing daily outflow of deposits, the imposition of capital restrictions is only a matter of days.

Total deposits have shrunk to €128 billion from €164 billion at the end of last November (before the launch of early elections).

Tags: suspension of payments European Central Bank the Bank of Greece loans financing
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