All eyes were on the European Central Bank (ECB) on Monday following the resounding ‘No’ in the Greek referendum, with the ECB seen as the only institution capable of calming market panic and preventing the Greek economy from collapsing.
In the final tally early Monday, 61.31 percent of Greeks had rejected creditor demands for further austerity in return for more bailout funds.
Until the referendum was held, the ECB had agreed to keep the liquidity pipeline open to Greek banks — and, by extension, keep the Greek economy afloat – via the eurozone’s Emergency Liquidity Assistance or ELA facility.
However, after Greek voters firmly slammed the door on a quick solution with their ‘No’ vote on Sunday, the ECB’s position as a source of liquidity for Greece’s banks has become far more difficult.
Ewald Nowotny, head of the Austrian central bank and member of the ECB’s decision-making governing council, said Friday that a meeting would be held on Monday to decide what to do.
“The Greek ‘No’ puts the ECB in a most difficult position,” said Berenberg Bank economist Holger Schmieding.
“Without a clear prospect of an immediate bailout deal that could prevent a full-scale sovereign default after Greece’s de facto default on the IMF last week. It is very hard for the ECB to authorise continuing emergency support for Greek banks, let alone to allow an increase in such support,” the expert said.
ELA is currently the only source of financing for Greek banks, and therefore the Greek economy. But with Greece’s bailout programme now officially expired and no new programme on the table, the conditions for ELA to be kept open are no longer fulfilled.
The ECB defines ELA as support given by eurozone national central banks in “exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets”.
The loans are made at the discretion of the country’s central bank, but they have to be approved by the ECB.
On Sunday, Athens said that the Bank of Greece had asked the ECB to raise the ELA ceiling as that is the only means for Greek banks to re-open.
If there are no euros in the banks, then Greece may be forced to introduce a parallel currency with which to pay its bills.
“How do they plan to pay salaries? How do they plan to pay pensions? Only at the moment where somebody introduces a new currency does he exit the eurozone,” European Parliament president Martin Schulz said on Sunday.
For the Frankfurt-based ECB, known as the “guardian of the euro”, a break-up of the eurozone would be the worst possible scenario and it has pulled out all the stops so far in a bid to prevent it.
But some of its governing council members believe that constantly violating the single currency’s rules, as Greece is perceived to have done, is just as destructive.
For that reason, the head of the German central bank or Bundesbank, Jens Weidmann, has consistently voted against ELA in recent weeks. He has the support of his Slovakian colleague and likely the Baltic central banks, too. And that support could grow on the ECB governing council.