In theory, the European Central Bank could pull the financial rug out from under Greece at any time, simply by refusing to sustain the country’s banking sector.
But when worse comes to worse, the Frankfurt central bank has a record of being lenient, experts say, a pattern it is likely to follow in Greece. The country has so far received almost €240 billion in aid from a troika of lenders.
But Greece’s future in the 19-nation euro will ultimately be decided by heads of governments, not central bankers. Until that decision is taken, the central bankers are readying emergency loans, called ELAs, to support Greek banks.
Greece’s banking sector is being sustained since the country’s election last month through a class of financial support called emergency liquidity assistance. Three Greek banks have received about €2 billion of those loans in the past two weeks, Reuters reported earlier this week, citing unnamed sources.
Greece's finance minister, Yanis Varoufakis, said he had a "fruitful exchange" with the ECB president, Mario Draghi, according to reporters.
“I expect … that the existing emergency liquidity assistance will be extended for another two weeks,’’ said Christian Schulz, a London economist at German private bank Berenberg. “It would be a big surprise if the (emergency liquidity assistance) ELAs were ended. It would mean an end to liquidity for Greek banks,” Mr. Schulz told Handelsblatt Global Edition.
The ECB governing council is expected to approve the extension later Wednesday at its regularly scheduled meeting. Greece's finance minister, Yanis Varoufakis, met Mario Draghi, the ECB president, earlier on Wednesday to discuss the country's debt problems.
Mr. Varoufakis said he had a "fruitful exchange" with Mr. Draghi and the Greek minister was looking forward to meet Germany's finance minster, Wolfgang Schäuble, on Thursday, according to Twitter messages from media attending the ECB meeting in Frankfurt.
The end of February is looming as the next big deadline in the euro zone’s Greek financial drama, which gained new urgency after leftists took control last month in a national landslide.
International financial support program for Greece will expire by March 1, and both sides, euro zone politicians and Greece, must agree on a new terms or risk a Greek default.
The new Greek prime minister, Alexis Tsipras of the leftist Syriza party, has called on lenders to write down another chunk of Greece’s debt, which lenders don’t want to do and which economists say would provide only minor help.
More than a week after the Greek election, the sides seem far apart.
The euro’s European overseers want to keep Greece in the currency, but are apparently only willing to bend so far, and an exit cannot be ruled out. As the sides begin what could be weeks or months of talks, the ECB is taking a conciliatory stance toward Greece, hoping for a similar reaction.
But a departure by Greece – willing or not – is a distinct possibility.
“There will be willingness in the ECB to continue funding the Greek banks, so long as there is hope for a political agreement,” said Antonio Garcia Pascual, the chief European economist at Barclays, told Handelsblatt Global Edition. “Evidently, if there is no political agreement and there is no hope for one, I don’t think the ECB will have much of an option.”
Many Greek banks are dependent on loans from the ECB. The sector’s situation has only gotten more precarious following Syriza’s election victory, which raised the possibility of Greece leaving the euro.
That prospect led some Greeks to withdraw money from banks and move it to other countries. This has worsened the situation worse for Greece’s financial system – and has made banks even more reliant on the ECB.
If Mr. Draghi, believes the central bank will no longer be paid back for the money it lends to Greece’s banks, he has an obligation to pull the plug on its loans. This could force the Greek central bank to begin printing another currency – the drachma again, for example – to keep the country’s banking system afloat.
But that is considered a worst-case scenario, and so far, most analysts are optimistic that a compromise will arise to keep Greece in the fold and the euro intact. The European Commission president, Jean-Claude Juncker, held out an olive branch to Greece last weekend, promising to end monthly visits by financial controllers sent by the country’s “troika’’ of lenders – the commission, the ECB and the International Monetary Fund.
The Greeks said the visits, highly publicized in Greece, were needless and harmful, feeding extremist movements and wounding Greek pride.
The ECB has demanded a new European rescue agreement for it to keep sustaining Greece’s banks.
“Greece's program extension will expire at the end of February, so some kind of solution must be found, otherwise we can't continue lending," Erkki Liikanen, the president of Finland’s central bank and a member of the ECB’s decision-making governing council, told Finnish television over the weekend, according to Reuters.
But how much time do the negotiators have? It appears to be open-ended.
Mr. Schulz, the Berenberg bank analyst, argues that since Greece’s financial sector is healthier than it was three years ago, the ECB has time to hold out for a good deal.
“You have to understand that Greek banks have been recapitalized and are in a better condition now. They face a potential liquidity crisis because customers are withdrawing money, not because the banks are to blame. That is why banks would deserve temporary support,” Mr. Schulz said.
The ECB’s governing council – the 25 individuals who steer monetary policy - will no doubt discuss the situation at their regular meeting today in Frankfurt. The central bank is taking the long-term approach, at least now, with Greece, but even its patience is not unlimited.
Dimitris Drakopoulos, a Greek economist at Japanese bank Nomura, points to Ireland and Cyprus, where the ECB threatened to pulled the plug, forcing local leaders into last-minute deals.
“Given those precedents, we know that ELA is not unconditional,” Mr. Drakopoulos said. “Much of the ECB’s leverage comes from it having control over how long ELA will be provided.”
In 2013, Cyprus threatened to reject a European plan to force bank depositors to take some loss in exchange for a Cyprus bank bailout. It was the ECB’s threat to cut off funding that eventually brought Cyprus back into line.
Still, Mr. Garcia-Pascual, the Barclays economist, said it’s hard to imagine a scenario where Mr. Draghi, the ECB president, will be the one to push Greece officially out of the euro zone.
That decisive move would have to come from Europe’s political leaders, he said.
“The decision will be taken by the heads of state,” Mr. Garcia-Pascual said. “Draghi will just be the one to push the button.”
Christopher Cermak is an editor with Handelsblatt Global Edition, covering economics and finance. Kevin O'Brien is a former Bloomberg Frankfurt and Vienna bureau chief and covered technology for The International Herald Tribune and New York Times for a decade. He is editor in chief of Handelsblatt Global Edition. Gilbert Kreijger is an editor with Handelsblatt Global Edition, covering companies and markets. To contact the authors: [email protected], [email protected] and [email protected]