Bank officials fear a ‘liquidity accident’

Greek bankers on Thursday stressed the need for an agreement to be reached between the government and Greece’s eurozone peers that will confirm the country’s European prospects, as the outpour of deposits continued unabated.

Thursday was another tough day for bank liquidity, as depositors continued to withdraw their savings for fear of a rift in talks between Athens and the eurozone.

Banks estimate that since the start of the week accounts have seen their balance shrink by another 2 billion euros and acknowledge that unless this trend is contained and reversed they risk finding themselves in big trouble without the dynamic intervention of the European Central Bank (ECB).

The ECB, however, has appeared reluctant to offer additional support without an agreement between the eurozone and the Greek government. On Wednesday the ECB’s governing council approved a small increase of emergency liquidity assistance (ELA) to Greece (by 3.3 billion euros), which can only marginally cover the needs of local lenders for the next few days. It was a move that was seen as an ultimatum of sorts for an agreement to be reached today in Brussels.

In the same context, the ECB’s Single Supervisory Mechanism (SSM) is planning to put pressure on domestic banks to reduce their exposure to Greek sovereign debt if today’s negotiations do not come to a positive conclusion.

There was major concern generated on Thursday in Athens from a report in German newspaper Frankfurter Allgemeine Zeitung according to which ECB board members reacted in Wednesday’s meeting to the raising of the ELA ceiling, calling for the imposition of restrictions in capital flows.

ECB sources later refuted the report but local bank officials conceded that as long as uncertainty continues, the chances of some sort of restrictions being imposed are growing. If there is an agreement at Friday’s Eurogroup the clouds of doubt will be dispelled. If not, the upcoming three-day weekend may likely test the Greek credit system to its limits, they say.

In a meeting on Thursday between Bank of Greece Governor Yannis Stournaras and Deputy Prime Minister Yiannis Dragasakis, the former said that the outflow from the credit system is under control, adding that “we are here to avoid an accident.”

Bank officials, however, make no secret of their concern about the course of negotiations and the uncontrolled rumors that undermine confidence, noting that a liquidity accident could come about at any moment without any major or dramatic event triggering it.

On the possibility of capital controls they note that this is an exceptionally complex issue that would have a very serious psychological impact on citizens and the market, as well as on the day-to-day operation of businesses.