Fresh cuts to bank collateral may lead to capital controls

Greek banks are sailing in uncharted waters as they hope for a swift agreement between the government and its eurozone peers to lift the current uncertainty. Deposits have declined to their lowest levels since the outbreak of the crisis.

Furthermore, for the first time, the European Central Bank is said to have been examining measures to reduce Greek lenders’ access to emergency liquidity assistance (ELA) in a bid to put more pressure on Athens for a solution. ECB President Mario Draghi noted the possibility that the collateral Greek banks use to draw ELA cash may come under review after last Friday’s Eurogroup meeting in Riga.

The outflow of deposits grew further last week as a result of a torrent of statements by domestic and foreign officials regarding Greece’s difficult situation. Bank officials told Kathimerini that the flight of deposits, previously at a rate of some 700 million euros per week, has now doubled, taking the balance of deposits close to a historic low of 130 billion euros. As a result, the ECB decided last Wednesday to raise the ELA ceiling by 1.5 billion euros, to 75.5 billion.

Bank estimates put the sum of household and enterprise deposits at 136 billion euros at the end of March, against 140.4 billion at end-February. In total, the ECB has supplied liquidity of 113 billion euros to help domestic lenders cope with the huge outflow of deposits from the credit system, amounting to a total of 30 billion euros since last September.

Sources say that the majority of deposit transfers are being conducted by enterprises with international transactions which are building up their defenses over fears of an “accident” or the imposition of capital controls.

As French central banker and ECB board member Benoit Coeure told Kathimerini in an interview last week, “the current situation clearly is not sustainable and the Greek authorities will have to take immediate and decisive action to reverse it.”

At the same time, Frankfurt is increasing its pressure on the politicians to accelerate negotiations and reach a conclusion: In this context, ECB sources have acknowledged that there are measures under examination to increase the haircut on the collateral Greek banks use to draw cash. Analysts point out that should Greek banks’ access to the ELA be restricted, given the marginal conditions in terms of deposits and the state’s cash absorption in order to serve its loan obligations, Greek authorities will be forced to imposed capital controls.

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