Eurogroup Official: "In The End Capital Controls Will Probably Have To Be Imposed"

The European Central Bank faces resistance from Germany to allowing any extra emergency lending for Greek banks, people familiar with the matter said, increasing pressure on Athens to sign up to an extended aid-for-reform programme…. the ECB’s policymaking governing council will review on Wednesday how far the country may support its weak banks, which face rising deposit outflows.  While the ECB is unlikely to lower the ceiling on emergency lending assistance (ELA) by the Greek central bank, a refusal to increase it would nonetheless be bad news for Greek banks, which are close to using up the full 65 billion euros granted so far.

Bundesbank chief Jens Weidmann, who has warned against the misuse of the emergency funding to indirectly finance the Greek state, is set to stick to this stance at the ECB meeting, the sources said. Some other governors have similar reservations.

A senior Greek banker told Reuters up to 500 million euros ($571 million) had been withdrawn from Greek bank accounts on both Thursday and Friday last week.

There was a lull on Monday but deposit outflows picked up again on Tuesday after talks collapsed, the banker said.

“The situation of the banks is getting more and more difficult every day,” said a European official. “In the end, in order to safeguard the banking system, capital controls will probably have to be imposed.”

The ECB’s chief economist Peter Praet has cautioned that the funding is for the short term only, although Austria’s central bank chief Ewald Nowotny recently signalled that the ECB would resume direct funding if Athens struck a deal to extend its EU/IMF bailout.

Frustration with Greece is growing. Euro zone finance ministers have given Athens until the end of the week to request an extension or lose financial assistance when the bailout expires at the end of February.

Were the ECB to cancel all emergency funding for Greek banks, as it threatened to with Cyprus in 2013, it would leave Athens with no choice but to strike a new deal with its international backers or face bankruptcy.

But the ECB would be very reluctant to take such a step.

“Pulling the plug on Greece would have potentially catastrophic consequences,” said Ashoka Mody, a former IMF official who helped design Ireland’s bailout.

“The ECB’s threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it.”

… ‘Grexit’ would constitute a non-diversifiable event, affecting all financial assets. This is because, upon the departure of one of its members, EMU would likely be seen as a fixed exchange rate arrangement between countries which can elect to adhere or leave. Convertibility risk would resurface, exposing the possibility of a collapse of the entire project.

To be sure, the ECB would not stand idle in the face of such a course of events. But the severity and persistence of the ‘shock’ from Grexit would depend on several factors, which include:

• What has led to the departure of Greece (metaphorically, was the country pushed or did it jump?).
• What institutional arrangements the remaining countries put in place to signal their commitment to stay together (presumably in the form of greater sovereignty sharing).
• How does Greece perform outside of the single currency?

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