The failure of euro zone finance ministers and leaders to reach a definitive deal on the Greek crisis yesterday is not entirely surprising.
Technically, Greece still has a week until its €1.6 billion payment falls due to the IMF and its bailout expires – an eternity in the world of the euro zone debt crisis. The real deadline, however, will be imposed by the European Central Bank. The dire state of the Greek banking sector, and the threat of a full-scale bank run, is a time bomb under the latest crisis talks.
As deposit outflows from Greek banks have accelerated, the ECB has held three crisis conference calls within the last week during which it agreed to raise the emergency liquidity assistance (ELA) it extends to Greek banks. Its decision last Wednesday to raise ELA by €1.1 billion and by a further €1.8 billion on Friday was intended to tide the banking sector over until Monday. Yesterday, it sanctioned a further increase, bringing the total emergency funding extended to the Greek banks via its central bank to €87.8 billion.
Capital controls
Unsurprisingly the issue of capital controls surfaced during yesterday’s meeting, with German finance minister Wolfgang Schäuble pushing the ECB on the issue, though he was shot down by
Mario Draghi
who insisted that the issue was one for the ECB and not a political matter. (A spokesman for Minister for Finance
Michael Noonan
declined to comment on reports that he supported Schäuble).
Nonetheless, yesterday’s ultimately inconclusive eurogroup meeting fulfilled a critical function by giving the ECB political cover to continue providing funding to Greek banks.
Technically, the ECB’s emergency support for Greece’s banking sector is dependent on Greece being part of an official bailout programme. Draghi, the president, has consistently said that the ECB can only continue to support Greece if its banks are solvent. Should Greece find itself locked out of a programme, the quality of collateral which its central bank is using to draw down the liquidity support would drop and the ECB would probably reassess its provision of funding.
Political certainty
By asserting that a deal is achievable by the end of the week and scheduling another eurogroup meeting three days in advance, euro zone finance ministers gave the ECB the political certainty it needs to continue to prop up the Greek banks.
Nonetheless, the pattern of continually assessing and reaffirming its provision of funding will not go on indefinitely. In any event, a non-payment to the IMF next Tuesday would automatically mean Greece was in default to all three creditors, and would almost certainly force the ECB to withhold its emergency support.
While the continuation of the ECB lifeline may tide the Greek banking sector over until Thursday’s meeting, the likelihood of a deal being agreed later this week will be decided in the political arena – both in Athens and in the various euro zone capitals.
In Athens, Greek prime minister Alexis Tsipras must sell the latest proposal to the Greek public and to his own government; already the head of Syriza's junior coalition partner has said he is opposed to any increase on VAT rates on the tourism industry.
Meanwhile Greece’s fellow euro zone partners must decide how far they are prepared to go to keep Greece in the euro. Noonan’s claim last Thursday that a bad deal is worse than no deal, is evidently shared by other finance ministers.
Member states are becoming increasingly hardline in their willingness to cede significant ground to Greece. But at the same time euro zone countries, through the ESM fund, are by far the biggest of Greece’s official creditors and risk losing tens of billions of euro should Greece default. These considerations are likely to occupy minds over the next critical 48 hours, as the future of Greece in the euro area is ultimately decided.