Rift would raise debt by 100 bln euros

A possible rift between Greece’s SYRIZA-led government and the country’s creditors would lead to the immediate increase of the state debt by some 100 billion euros, as the cash flow supplied to Greek banks via the emergency liquidity assistance (ELA) mechanism burdens the Bank of Greece and not the European Central Bank. Therefore, should banks be unable to return the money borrowed, this would hurt the Bank of Greece, and therefore the Greek state.

Furthermore, some 100 billion euros of corporate and household loans have already been submitted to the Eurosystem as collateral for the drawing of liquidity through the ELA, which means that about 55 percent all loans in local lenders’ portfolios have already been used as collateral. “This practically accounts for the entire sum of performing loans – i.e. the loans that households and enterprises service properly,” a senior bank official told Kathimerini.

Greek banks have already drawn some 80 billion euros from the ELA, but have submitted collateral of about 100 billion euros, as the ECB imposes a haircut on the collateral’s nominal value for security purposes. Bank officials estimate that this collateral could constitute the basis for future legal claims and demands against Greece in case of a rift.

Bankers, however, stress that this is all in theory as an agreement with the country’s creditors is imperative. They note that the consequences of a Greek default or eurozone exit would be unfathomable, not only for the country today but also for future generations, underlining that it is not within the spectrum of options. The question, they add, is how quickly a deal can be completed so as to avoid capital controls, as that would have profound consequences on enterprises and economic activity in general, causing a shock to the already fragile economy.

On Friday Reuters reported that the ECB is already preparing to halt the liquidity supply to Greek banks in case the country forfeits on its obligations. It added that the end of June would constitute a key date for the country.

Also on Friday Standard & Poor’s downgraded the credit rating of the local systemic banks one notch to CCC.

Deposits in the Greek credit system have dropped from 164 billion euros at end-November to just 128 billion euros today.