The bank holiday has been extended by at least two days (until Wednesday night), but local lenders are now just a step away from serious solvency problems after the European Central Bank decided on Monday to increase the haircut on the collateral they use to draw liquidity.
Frankfurt’s decision sent shock waves through Greece’s banking sector as hardly anyone had expected it would use a haircut on collateral to send its own message before the political decisions expected on Tuesday in Brussels. In doing so, the ECB is further increasing the pressure on the Greek government to agree to a deal at Tuesday’s eurozone summit, otherwise the country’s banks may face a sustainability problem on top of their liquidity woes.
The haircut increase reduces the last cash banks can draw from the emergency liquidity assistance (ELA) by two-thirds, running the risk of finding themselves unable to complete any transactions and thus be deemed insolvent.
The European Stability Mechanism (ESM) warned late last week that Greece’s failure to pay a 1.6-billion-euro tranche to the International Monetary Fund on June 30 constitutes a payment default and allows the ESM to immediately demand all the funds it has lent to Greece and confiscate all bank shares controlled by the Hellenic Financial Stability Fund (HFSF).
Banks estimate that after Monday’s decision the ceiling on the cash available for them to withdraw has dropped from 18 billion euros before the haircut increase to just 5 billion. A similar increase at Wednesday’s ECB meeting would mean that Greek banks would be unable to cover the liquidity they have already drawn with new collateral.
The ECB also kept the limit on the ELA available to Greek lenders unchanged and will review the situation at Wednesday’s meeting, i.e. after the completion of Tuesday’s eurozone summit.