So Goes Greece?

Could Russia be looming in the dark?

At 3 am this morning in Greece:

Greece’s parliament has voted in favor of Prime Minister Alexis Tsipras‘ motion to hold a referendum on the country’s creditor proposals for reforms in exchange for loans. Tsipras and his coalition government have urged people to vote against the deal, throwing into question the country’s financial future.

The vote is to be held next Sunday, July 5. It has raised the question of whether Greece can remain in Europe’s joint currency, the euro. Many Greeks alarmed by the announcement for the referendum early Saturday morning formed queues at ATM machines, putting a further strain on banking deposits.

FRANKFURT: Greek banks have been heavily dependant on ” Emergency Liquidity Assistance” (ELA) since being cut off from standard European Central Bank funding options in early February.  These are effectively loans given at the discretion of the national central bank of the country in question, although they have to be approved by the ECB.

The ECB adds that the national central banks may provide ELA “against adequate collateral” and only to “illiquid but solvent” credit institutions.

Any changes to the limits of ELA require a two-thirds majority in the ECB’s 25-member Governing Council. The Governing Council approves maximum ELA amounts for each individual bank.

The exact details of ELA are not published but the average interest rate charged on it is estimated to be around 100 to 150 basis points above the ECB’s benchmark interest rate. That rate is currently 0.05 percent.

The collateral banks post when using ELA is typically of a lower average quality than is normally accepted by the ECB. But a larger ‘haircut’ – or discount – is also usually applied to counterbalance some of the risks.

A key justification for ELA provision is to “prevent or mitigate potential systemic effects as a result of contagion through other financial institutions or market infrastructures.”

ELA loans sit on the balance sheet of the national central bank and therefore that of the Eurosystem of central banks (the euro zone’s 19 national central banks plus the ECB), but not directly on the ECB’s own balance sheet.

Is a Plan B in the works? Sunday’s emergency meeting could spell out that answer.

‘Plan B’ looms after Greece and Europe fall out

Brussels (AFP) – With Greece’s creditors refusing to extend its bailout, attention has turned swiftly to preventing massive capital flight as worried Greek citizens pull cash from ATMs.

Fears that the banks may not open Monday have prompted the European Central Bank to meet but officials say it will be up to Greece to stem an outflow that has already reached dangerous levels.

“If there isn’t capital controls by Tuesday at the latest, it’s over,” said a European source close to the negotiations.

“Greek banks are near liquidation and can no longer remain solvent. Once the banks fail, ‘Grexit’ will become irreversible,” the source said.

Talks on Saturday collapsed with the Greek contingent leaving the remaining 18 eurozone ministers to consider the consequences of a default.

In a statement, the ministers appeared to urge Greece towards capital controls, saying that the expiry of the bailout “will require measures by the Greek authorities, with the technical assistance of the institutions, to safeguard the stability of the Greek financial system.”

The withdrawals today were “exceptionally high,” warned the influential German Finance Minister Wolfgang Schaeuble at the talks on Saturday.

Faced with this calamity, Natixis analysts Jesus Castillo and Alan Lemagnen said the Greek government could decide a bank holiday, an order that the nation’s banks remain closed to avoid a run by customers.

Similar moves were made in 2013, when Cyprus imposed drastic limitations on cash withdrawals and money transfers abroad when its banks faced crisis — in large part due to contagion from the crisis in Greece.

– ‘Fight contagion’ –

“We will do everything to fight against any possible danger of contagion,” Schaeuble added.

If the scenario were repeated in Greece now, European leaders would act to prevent the same contagion that flowed from Greece in 2012 to other troubled eurozone members like Spain, Portugal and Ireland.

That disruption was caused by spooked investors shunning the bonds of vulnerable countries, sending their borrowing rates unsustainably high. At the same time, banks in healthier eurozone countries holding debt of weak eurozone nations were suddenly seen as a risk.

But risk of renewed contagion has been greatly reduced by firewalls built since 2010 by eurozone authorities, and the creation of a European banking union to police lenders and oversee a collective response to the crisis.

And in the meantime, most European banks have significantly wound down their exposure to Greece and other troubled eurozone members.

The ECB also now has tools unavailable to it in 2010. It is in the midst of successful quantitive easing programme injecting liquidity into the eurozone economy, and could easily step up its purchases of sovereign bonds if investors dump debt.

It could also deploy the thus far unused “outright monetary transactions” to purchase sovereign debt — a plan it unveiled in 2012 to calm panicked markets, and which has recently cleared legal challenges from opponents.

Until Saturday’s debacle in Brussels, the ECB bought time to allow discussions to continue, pumping cash into the teetering Greek financial system.

To achieve that, the Frankfurt-based central bank maintained its emergency liquidity funding to Greek banks to prevent their collapse — and in doing so withstood heated opposition from Germany.

So far ECB chief Mario Draghi has refused to cut emergency funding for Greek banks, but that decision is expected to be soon reversed.

The central bank’s governing council is set to hold an emergency meeting on Sunday, and a decision to end the lifeline is increasingly expected.

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Denise Simon