The European Central Bank reassumed its role as lender of last resort today raising its liquidity provisions to Greece’s banks after the country's parliament passed the austerity measures demanded by its creditors.
ECB president Mario Draghi noted that "Things have changed now," in his press conference in Frankfurt following the central bank’s decision to leave its main interest rate unchanged. The central bank will increase its Emergency Liquidity Assistance (ELA) funding to the Bank of Greece by 900 million euros as requested.
Greece’s banks have been closed since June 29th and capital controls, imposed by the Athens government to preserve the system’s dwindling cash, have limited withdrawals to 60 euro per day per account. With the new ELA money Greek banks are expected to reopen on Monday.
Mr. Draghi also said that “We always acted on the assumption that Greece will remain a member of the euro area. There was never a question.”
That may have been the ECB's assumption. But until Greek Prime Minister Tsipras capitulated to the demands of the creditors on Sunday the ECB was prepared to deny Greek banks additional liquidity, a stance that would have destroyed the Greek banking system had it continued.
What is unknown is whether Greeks will view the returned access to their money as a chance to withdraw or transfer their remaining cash or if the weekend agreement with the Europeans for another bailout, the third, is enough to restore the population’s faith in the financial system.
Greek depositors withdrew 8.1 billion euros in June, about 6 percent of the entire bank deposit base. Even under capital controls withdrawals continued at just under 100 million euros per day.
If withdrawals resume at the pace of the last days before the shuttering of the banks, the new ELA funding would probably not last more than three or four days and the ECB would have to extend more ELA cash to keep the banks solvent.
Euro area finance ministers also agreed in principal to provide a 7 billion euro ($7.6 billion) bridge loan to the cash strapped Athens government. The emergency loan would enable Greece to make a 3.5 billion euro ($3.8 billion) bond payment to the ECB on Monday.
If that redemption was missed, the ECB would be under severe pressure to declare Greek banks insolvent and suspend or withdraw ELA funding. Without the ECB backstop Greek banks would almost immediately collapse for lack of funds.
The bridge loan is necessary to keep the country afloat while the government of Prime Minister Alexis Tsipras receives the terms of his requested three year 86 billion euro ($94 billion) rescue package.
The bailout would come from the European Stability Mechanism (ESM), the euro-area fund established in 2012 that has already given bailouts to Spain's banks and Cyprus. Earlier bailouts for Greece, Portugal, and Ireland were completed by two temporary programs the European Financial Stability Facility and the European Financial Stabilisation Mechanism.
The European governments who demanded the harsh terms of the bank closure and austerity agreement now face the possibility that the financial system is no longer trusted by the Greek people.
With plentiful electronic access to banks in the rest of the euro zone, why would Greeks keep their funds in institutions where they can be frozen or appropriated?
In using the ECB to block Greeks' access to their own money as a way of pressuring the national government, the Europeans may have seriously damaged Greek finance and created another impediment to the revival of the Greek economy.
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