The Eurozone's central bank piled more pressure on Greece ahead of today’s crucial summits, by making it harder for the country’s struggling banks to access emergency loans.
The move, revealed yesterday, is not expected to push any Greek banks to the brink, but was widely seen as a turning of the screws on Greece that could nudge its top negotiators closer to a new bailout agreement.
“This is a further warning shot to the Greek government that an agreement with its creditors is needed, and soon,” said BNP Paribas economist Ken Wattret.
Later last night Greek PM Alexis Tsipras told European Central Bank (ECB) boss Mario Draghi that there is an urgent need to lift capital controls that are suffocating the struggling country’s economy.
Earlier, European leaders insisted that Greece’s government must table fresh proposals at today’s emergency Eurozone summit, with German Chancellor Angela Merkel continuing to take a hard line despite Greece’s defiant referendum result on Sunday.
Merkel said there remains nothing to negotiate until new suggestions are made by Greece, adding that the last bailout offer – rejected by Greece – was already a generous one.
French President Francois Hollande, speaking alongside Merkel after talks between the pair yesterday, added: “It’s now up to the government of Alexis Tsipras to offer serious, credible proposals.”
The ECB had earlier said that it would keep the ceiling on its Emergency Liquidity Assistance (ELA) provision to Greece at €89bn (£63bn).
However, the discounts that apply to the collateral provided by Greek banks in order to access the funding – also known as haircuts – were lifted.
An ECB official said the decision will be reviewed tomorrow, adding to the pressure on Greece and its creditors to finally come to an agreement.
The Greek banking system has opted to keep its doors closed for another two days, for today and tomorrow, with a €60 daily cap on cash machine withdrawals.
But economists say it will be impossible for them to open again until emergency lending is allowed to rise – and even when it does, capital controls such as cash machine caps may still be needed.
“Even if a deal is struck and banks open relatively soon, capital controls should remain in place for some time, as was the case in Cyprus,” said economist Konstantinos Venetis from Lombard Street Research. “ELA will, for as long as it remains available, not meet Greek banks’ requirements, but dictate the pace of deposit outflows.”
Central banks often act as lender-of-last-resort to banks to solve liquidity crises. But they can only lend on “good collateral”. So far this collateral has been Greek government bonds, but with the government falling behind on payments to its creditors this debt is no longer considered “good”.
Many economists say 20 July is effectively the new “D-day” for Greece. A failure by Greece to honour a €3.5bn payment to the ECB would essentially end ELA for good, and formalise the country’s default.
“The financial system would collapse, necessitating large-scale recapitalisations/bail-ins, paving the way for IOU issuance and forcing the gates of Grexit wide open,” Venetis added.
Chris Papadopoullos, Julian Harris