Capital controls risk increasing
Greece is facing some tough decisions ahead, with time running dangerously short for its banks and economy, which are on the verge of crumbling. Deposits are shrinking by the day, Moody’s warns that capital controls are edging ever closer and all eyes will be on Wednesday’s crucial meeting of the European Central Bank’s board.
Frankfurt will examine Greek lenders’ liquidity conditions and discuss whether or not to increase the emergency liquidity assistance available to them. Given that the outflow of deposits currently stands at some 250-350 million euros per day, it is certain that banks will require a further rise in the ELA limit, as the safety cushion of available cash is understood to have now fallen below 3 billion euros.
In the last few weeks the ECB has only released enough liquidity to Greek banks to keep them on life support and it is expected to do the same on Wednesday despite pressure by board members who desire a toughening of the stance toward Greece.
Most analysts agree that there will be no surprises this week, will Frankfurt expected to wait for the politicians to provide an end to the drama of the last few months. There should therefore be a small increase to the current ceiling of 80.7 billion euros.
The continuing outflow of deposits is, according to ratings agency Moody’s, increasing the risk of the imposition of capital controls that would amount to a state of bankruptcy for bank deposits. Although Moody’s estimates that Greek lenders have sufficient collateral to draw additional liquidity of 35 billion euros through the ELA, it believes that the threat of capital controls has increased considerably.
The risk of capital controls is also highlighted by JP Morgan. Although its baseline scenario is for Greece to reach a deal with its creditors in the next three weeks, it says that the risk of capital controls has risen. Any such restrictions would constitute an additional shock to an economy that is returning to recession, JP Morgan added.
