All eyes on ECB after Greek 'No' vote

All eyes were on the European Central Bank 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, sending Greece's eurozone partners scrambling to respond and European stock markets tumbling.

Until now, the ECB has agreed to keep Greek banks -- and, by extension, the debt-wracked Greek economy afloat -- on life support via the eurozone's Emergency Liquidity Assistance or ELA facility.

But the overwhelming 'No' vote has made the ECB's position far more difficult.

"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," said Berenberg Bank economist Holger Schmieding.
Among the flurry of meetings by European policymakers to decide how to respond to the referendum, ECB president Mario Draghi was scheduled to talk via telephone conference with EU Commission chief Jean-Claude Juncker, Eurogroup head Jeroen Dijsselbloem and the head of the European Council Donald Tusk on Monday morning.

Draghi would then chair a meeting of the ECB's governing council later in the day to discuss ELA, after the Bank of Greece requested that the ELA ceiling be lifted.

- Doing the 'dirty work' -

"While politicians in the eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work," said ING DiBa economist Carsten Brzeski.

"The 'No' has not made the ECB's life any easier. With every step that Greece is moving closer to total default or even a Grexit and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA," Brzeski said.
In Paris, French Finance Minister Michel Sapin insisted that the ELA "cannot be lowered".

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".

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, 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.

- Bundesbank hard line -

For that reason, the head of the German central bank or Bundesbank, Jens Weidmann, has consistently voted against ELA in recent weeks. And support for his hardline stance could grow on the ECB governing council.

A two-thirds majority would be needed on the 25-seat board to shut down ELA.
Deutsche Bank economist George Saravelos predicted that for Greek banks, ELA liquidity was likely to be fully exhausted over the next few days.

That would leave cash machines empty and Greece would no longer be able to finance imported goods via outgoing payments.

"An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to a eurozone exit," Saravelos said.

But central bank watchers said the ECB would not want to be the one that pulls the plug on Greece and force a so-called "Grexit".

"The ECB will not be the one pulling the trigger on Greece. As long as eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels," said Brzeski at ING DiBa.

But the ECB's patience could run out later this month.

Greece is due to repay 3.5 billion euros ($3.9 billion) in loans to the ECB on July 20.

If Greece is unable to meet the deadline and default on the payment, "it is very hard to see the ECB continuing ELA," said Brzeski.