The European Central Bank may choose to buy time for politicians to discuss the referendum that has left Greece’s finances hanging by a thread.
While the Governing Council is due to talk on Monday on whether to keep supporting the country’s crippled lenders, it’ll probably be reluctant to preempt a planned meeting of euro-area leaders. German Chancellor Angela Merkel and French President Francois Hollande spoke late Sunday, and European Union President Donald Tusk called a euro-area summit for Tuesday.
A popular vote to reject the terms of an EU-led bailout has left Greece on the verge of running out of money, trapping the ECB between the moral hazard of funding a system close to bankruptcy and the dramatic consequences of shutting it off. Given the risk of splintering the euro, ECB President Mario Draghi and his colleagues have so far signaled they’ll take their lead from elected representatives.
“It is clear that the ECB has no appetite to front-run the political process,” Michala Marcussen, global head of economics at Societe Generale SA in London, said in a note on Sunday. “As long as discussions are ongoing between the Greek administration and the euro area, we consider it unlikely that the ECB would fully cut the Emergency Liquidity Assistance and Greek banks’ access to ECB liquidity facilities.”
An ECB spokesman declined to comment on the Governing Council’s plans. Draghi will hold a call on Monday morning with Tusk, European Commission President Jean-Claude Juncker and Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, the EU Commission said in a statement.
Merkel and Hollande, who will meet Monday at 6:30 p.m. in Paris, said the decision of the Greek people is to be respected. The Euro Working Group will discuss Greece the same day.
While political talks between Greece and its creditors halted after Prime Minister Alexis Tsipras announced the referendum more than a week ago, Tsipras said following the vote that his country will return to the negotiating table on Monday. Greek Finance Minister Yanis Varoufakis told Bloomberg on July 2 that the nation’s banks, shut and under capital controls for the past week, will open on July 7.
As politicians take the time to settle into their negotiating positions, the ECB is watching the financial- stability risks. The euro fell more than 1 percent to below $1.10 when trading resumed after the weekend break.
The ECB claims it has the policy tools available, and the capacity to develop new ones, to tackle financial turbulence in the currency bloc and elsewhere. As well as potential adjustments to its established asset-purchase programs, the ECB has international currency swap lines in place and has made backstops available for non-euro countries in eastern Europe.
“In the current circumstances of great uncertainty in Europe and the world, the ECB has been clear that if we need to do more we will do more,” Executive Board member Benoit Coeure said in Aix-en-Provence, France, on Sunday. “Our will to act in this matter should not be doubted.”
The extent to which the will to do more extends to Greece is what will dominate the Governing Council’s discussions on Monday. Shut off from international markets and ruled out of the ECB’s bond-buying programs, Greek banks have for the past five months relied on Emergency Liquidity Assistance from their own central bank, with the ECB’s approval. Now that aid is also close to running out.
Unless the 88.6 billion-euro ($97.5 billion) ceiling on ELA is increased, lenders may have to restrict cash withdrawals further. Yet with no bailout deal on the table that could rescue Greece’s finances, ECB policy makers can’t ignore their duty to protect the Eurosystem.
“Without the prospects for such a deal soon, the ECB has no basis to send more euros to Athens when it discusses further ELA to Greek banks on Monday,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Greece needs more euros urgently. Without a deal, its sovereign and its banking system would soon be insolvent.”
For the Governing Council, the urgency is intensified by another looming deadline. On July 20, Greece is due to pay 3.5 billion euros back to the ECB as bonds bought under an earlier crisis rescue mature.
That’s the “most important” date, ECB Governing Council member Ewald Nowotny said on June 30. Bound by European law that forbids the financing of governments by central banks, the ECB couldn’t consent to a non-payment and may be compelled to take drastic steps if it happens, putting Greece on the path to leaving the euro area.
“There is a practical mechanism to trigger exit, namely the withdrawal of ELA,” Deutsche Bank AG economists Mark Wall and Marco Stringa said in a note. “The exit of a member state would be seen as the most significant crisis for the single currency to date.”