ES in Greek banks tumbled yesterday over fears they will lose their European life support.
Share prices in three major Greek banks – Piraeus, the National Bank of Greece and Eurobank – dropped in excess of 10 per cent. They saw similar drops on Monday.
The banks rely heavily on funding from the European Central Bank. Yet this funding could be removed if the new Syriza-led government fails to strike a deal with Europe on its bailout.
The ECB funds Greek banks through its Emergency Liquidity Assistance (ELA) scheme but may end it if Greece leaves its bailout.
“If Greece leaves the bailout programme (due to expire at the end of February) things could get messy very quickly,” said Joshua McCallum, head of fixed income economics at UBS.
“The amount of ELA almost doubled from November to December, due to capital flight in anticipation of a Syriza victory. The capital flight would turn into a flood without a bailout programme, leading to a severe banking crisis that the ELA could not stop. Capital controls would have to be imposed, and at that point Greece would effectively have left the single currency.”