Banks, currently on life support, need to return to normality

Greek lenders can be said to be on life support as they are relying on emergency liquidity assistance (ELA) funds from the Bank of Greece to meet their cash demands. Deposits, meanwhile, are in constant decline, reaching the lowest point since the outbreak of the crisis, owing to uncertainty about the outcome of the government’s negotiations with the country’s creditors.

Bank officials estimate that deposits currently come to no more than 147 billion euros, considerably lower than where they were in June 2012 (150 billion euros), under the pressure of the twin general election. Lenders calculate that in December and January Greek deposits posted a drop of about 16 billion euros, while the decline has continued in February.

Last week’s decision by the European Central Bank to stop accepting Greek bonds as collateral for the supply of cash to local lenders as of this Wednesday means that some 50 billion euros of collateral (state guarantees, treasury bills and bonds) on which liquidity has been drawn, are to be transferred to ELA.

Senior bankers told Kathimerini that the ECB’s decision will not have any direct impact on account holders but it does generate concerns that the outflow of deposit will continue. Furthermore, most of the sum excluded (the state guarantees) would anyway get transferred to ELA as the ECB decided several months ago to stop accepting state guarantees issued by member-states as collateral.

Local bankers believe that the ECB has decided to harden its stance in order to accelerate political negotiations. They see the decision as Frankfurt’s way of sending a message to politicians saying “find a solution or shoulder the risk of what may follow.” They added that the message is not just directed at Athens but also at other eurozone governments.

The ECB has been accused of political gaming but has brushed off such criticism, persisting with dynamic interventions that it deems are to the benefit of the eurozone’s cohesion.

Still, relying on ELA is far from ordinary. As a mechanism it is exactly what its name says: An emergency system for extraordinary situations. And this abnormality will have to end as soon as possible. Bankers highlight that priority must be given to end the present uncertainty regarding the country’s future in the eurozone so that the economy and the credit system can return to regular conditions.

The existing uncertainty creates a vicious cycle of shrinking deposits, increasing nonperforming loans, a freeze on new loans and a suspension of investments, all dragging on the performance of the economy.